Wholesale Money Market Rates On The Rise Again

The wholesale money market in the UK is in a state of stagnation as banks try to protect their cash in the run up to the New Year reporting period.

The one month Libor rate – which banks use to lend money to each other was up by 0.63% on Monday to 6.72% - a nine year high. The three month rate was up to 6.62%, making money market conditions their worst since the credit crunch first started to take its grip on 9 August.

Central banks in London, Frankfurt and Washington fought desperately to stave off the rises by injecting cash into the system, but to no avail. This is bad news for borrowers as these rates will have a direct and adverse impact on mortgage and loan rates.

These rising rates will bring even more pressure to bear on the Bank of England to cut the base rate from 5.75% this week. Nevertheless, members of the Monetary Policy Committee have made it clear in the past two weeks that their primary concern is to keep inflation under control, and that has been rising, and with oil and food prices on the rise, November’s consumer price index figure is likely to be higher than October’s 2.1%.

Jonathan Loynes of Capital Economics said: “Banks are scrambling for funds to get safely through to the end of the year. Outside the one-month rate, the three-month rates have been creeping up again over last few weeks. There was a period where it looked as if we were through the worst, but the mood seems to have turned more pessimistic again. It seems to be a reflection of continued liquidity problems. It makes it more urgent that the Bank of England cuts rates. Whether or not they cut this week or not is still very unclear.”