The Bank of England cut interest rates by 50 basis points last week, and it had absolutely no effect whatsoever on the three-month sterling interbank interest rate. Actually, while the Bank of England was cutting, interbank rates were rising. As things stand, it appears that Bank of England has lost control of interest rates.Again, today central banks are pumping out extraordinary amounts of liquidity into the financial markets. The financial Times reported that across Europe more than $250 billion was injected.
Thins are not any better across the channel. The ECB relaxed its criteria for the collateral, lowering the credit rating threashold for accepting assets to BBB- from A-. It also said it would accept assets denominated in foreign currencies and debt instruments issued by credit institutions. In other words, the ECB is now accepting any old rubbish as collateral.
The breakdown of the interbank market is most acute with longer maturities. The overnight dollar LIBOR rate is down to 2.14 percent. At the same time, three-month dollar Libor rate is hovering around the 4.5 per cent level.
Even with all the recent announcements to recapitalise the banks, guarantee deposits, and underwrite the interbank market, banks are still unwilling to lend to each other anything longer than a few days.
It could take a long time before things returned to normal.
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