3 Month Libor Interbank Lending Rate

Definition of 3 Month LIBOR - The Libor is the London Interbank Offered Rate. This is the rate at which commercial banks lend to each other in the London wholesale money markets. The 3 month libor is often a better guide to lending costs (and saving rates) than Base rates.

As we approach Christmas there is little good news on the housing / mortgage front to offer any seasonal cheer. However, for those with mortgages, at least they will be seeing some reduction in mortgage costs as the 3 month libor continues to fall. On 15th December, the 3 month libor stood at 3.13% (still 1.13% above base rate of 2%) But, this is a smaller gap than at other periods of the credit crisis.

In normal times, the 3 month libor closely follows the base rate, but, the credit crunch has made banks reluctant to lend to each other causing a shortage of funds and higher interbank lending costs.

This is one reason why many banks have not passed the base rate cuts onto consumers (it is also why saving rates have not fallen by as much as base rates)

However, a fall in the libor will not by itself revive the housing market. The real problem is that falling house prices mean lenders are still reluctant to lend mortgages unless the customer has a very big deposit. As house prices fall, lenders don’t want to lend causing house prices to fall – it is a vicious cycle.

The 3 month libor interbank lending rate has now fallen to 1.85% according to: data on the 3 month libor interbank lending rate from 1988 – (you can see how the 3 month libor was above 15% for quite a few months in 1990