Long-term Sterling rates hit record highs while short-term pressures ease

6 Sep 2007

The European Central Bank's intervention this morning to inject short-term liquidity into the market has brought overnight lending rates in the Eurozone sharply down, as indicated by the drop in overnight euro BBA LIBOR from 4.68 to 4.13125. However, in the longer–term little effect can be seen as rates are virtually unmoved with three-month euro BBA LIBOR today setting at 4.76.

In the UK, the continuing effects of the Bank of England's actions yesterday have seen a further gentle easing of the overnight Sterling lending rate to 5.900 – only a few basis points above the levels we would expect in normal market conditions.  However, the three-month Sterling BBA LIBOR rate continues its climb to a new high of 6.87 per cent (up from 6.800 yesterday). This is its highest level relative to the Bank of England base rate since the collapse of LTCM in 1998.

BBA Chief Executive Angela Knight CBE said:

"The actions of central banks seem to be easing short–term rates.  However, the conditions in the 3–month and longer term lending markets continue to be of concern."

Key facts about BBA LIBOR

1. What is BBA LIBOR?

The British Bankers' Association London Interbank Offered Rate closely reflects the real rates of interest being used by the world’s big financial institutions.  Central banks (such as the Bank of England, the US Federal Reserve and the European Central Bank) may fix official base rates monthly, but BBA LIBOR reflects the actual rate at which banks borrow money from each other.

BBA LIBOR figures are issued daily on more than 300,000 screens around the world. Rates are quoted for a range of borrowing periods, ranging from overnight loans to 12 months, and a range of world currencies.

When referring to these rates, please note 'LIBOR' is a generic term, which refers to an individual 
Bank’s rate. 'BBA LIBOR' is the benchmark index of London interbank lending. The term LIBOR has been used erroneously to describe this industry standard, but as individual banks may calculate their own Libor rates, the term BBA LIBOR should be used to distinguish them.

2. Why is it in the news?

Because BBA LIBOR rates are calculated daily from the rates at which banks agree to lend each other money, it is a more accurate barometer of how global markets are reacting to market conditions. Recently the overnight borrowing rate has been moving considerably.

3. How is it calculated?

The BBA uses Reuters to fix and publish the data daily, usually before 12 noon UK time. It assembles the interbank borrowing rates from 16 contributor panel banks at 11am, looks at the middle 50 per cent of these rates and uses these to calculate an average, which then becomes that day’s BBA LIBOR rate. This process is followed 150 times to create rates for all 15 maturities (ranging from overnight to 12 months) and all 10 currencies for which a BBA LIBOR rate is quoted.

4. What should I be looking for?

Dramatic changes in the overnight BBA LIBOR rate mean that there is short term volatility in the markets. The overnight rate is the rate which is most often quoted in the financial press. The banks’ longer-term expectations for the markets are more clearly evident in the 12-month figures.

5. How did it become so important?

BBA LIBOR was first developed in the 1980s as demand grew for an accurate measure of the real rate at which banks would lend money to each other. This became increasingly important as London’s status grew as an international financial centre. More than 20 per cent of all international bank lending and more than 30 per cent of all foreign exchange transactions now take place in London.

BBA LIBOR is now used to calculate the interest rates for a range of financial instruments and derivatives based on the BBA LIBOR rates are now traded on exchanges such as LIFFE, the Chicago Mercantile Exchange (CME) and SIMEX. Independent research from Prof. Donald Mackenzie of the Universtiy of Edinburgh estimates that financial derivatives totalling USD 150 trillion are indexed to BBA LIBOR.

For further information, please contact:
Press office (020 7216 8989)
Out of hours contact (020 7216 8888)

Notes to Editors

This briefing is part of an occasional series offered to journalists while the current market volatility continues.

The BBA permits the use of the logo for BBA LIBOR in appropriate circumstances, including media reports. You can download a copy of he logo from the link below.

Daily BBA LIBOR rates are published by Reuters and are available also through Thomson Financial, Telekurs, Bloomberg, Infotec, IDC, Quick, Class Editori, Proquote and other information providers.

Historic BBA LIBOR rates are available from the link below.

Related Links
Historic BBA LIBOR rates (Internal Link)
BBA LIBOR Logo (External Link)