Libor rises to 5.84% on gloomy inflation report

by Gill Montia

Story link: Libor rises to 5.84% on gloomy inflation report

The publication of the Bank of England’s gloomy quarterly Inflation Report earlier this week was followed by an unexpected rise in Libor yesterday.

Three month Libor (the rate at which banks lend to each other) rose from 5.70% to 5.84%, in response to the news that inflation is now running at 3% and a June cut in the base rate has been ruled out.

The Bank’s Special Liquidity Scheme, which was launched in April with £50 billion of cash, was intended to keep Libor on a downward path and yesterday’s rise was the first since the scheme began.

The injection of cash and an agreement whereby banks could use a range of mortgage-backed assets as security were intended to ease conditions on the wholesale money markets.

However, yesterday’s rise in three month Libor could mean that the credit crisis is deepening and mortgage interest rates will increase.

The Bank of England auctioned £13.7 billion yesterday. The auction was hugely oversubscribed, with UK banks keen to borrow £78.3 billion in total.