Dollar Libor Drops as Central-Bank Cash

Rate Cuts Thaw Lending 

By Gavin Finch

The cost of borrowing dollars for one month in London fell to the lowest level in almost four years as central-bank cash injections and interest-rate cuts worldwide showed signs of thawing the freeze in lending.

The London interbank offered rate, or Libor, that banks charge each other for such loans slid 18 basis points to 2.18 percent today, the lowest level since November 2004, and the 17th straight decline, according to British Bankers' Association data. The three-month rate dropped 15 basis points to 2.71 percent, the lowest level since June 9, according to BBA figures.

Interbank rates have tumbled worldwide as central banks slashed interest rates and governments pledged as much as $3 trillion of emergency funds to kickstart lending. Australia's central bank cut its benchmark rate by a bigger-than-expected 75 basis points to 5.25 percent today, joining policy makers in China, Hong Kong, India, Japan and the U.S. in reducing borrowing costs in the past week.

``The central bank measures have helped ease the severe tensions we were seeing,'' said Christoph Rieger, a fixed-income strategist at Dresdner Kleinwort in Frankfurt. ``There's pretty brisk activity in the dollar space out to one month.''

The European Central Bank and Bank of England will cut their key rates by 50 basis points in two days, according to Bloomberg surveys. Three-month dollar Libor also slid for a 17th consecutive day today, according to the BBA. The rate was at 4.82 percent on Oct. 10, the day before the streak began.

`More Stability'

``We're seeing more stability in money-market rates,'' said Song Seng-Wun, a regional economist at CIMB-GK Securities Pte in Singapore. ``There is money there and liquidity is flowing a bit better. But I suppose financial institutions remain cautious about lending.''

The Frankfurt-based ECB today lent banks 312 billion euros ($398 billion) in its weekly auction at 3.75 percent, 243.5 billion euros more than it estimated was needed. The ECB loaned a further $70.8 billion for 84 days at 1.6 percent to boost dollar liquidity in Europe.

Borrowing among banks, essential to keep financial markets working, froze after Lehman Brothers Holdings Inc. filed for bankruptcy Sept. 15, shattering lenders' confidence they would be repaid. In a sign some banks are still wary of lending, financial institutions deposited a record amount of cash with the ECB, lodging 280.23 billion euros overnight at a rate of 3.25 percent. Banks deposited about 279.37 billion euros on Oct. 31.