'Room for a Libor increase' due to credit crisis

24 April 2008

Inter-bank rates might be on the rise again as the credit crunch continues, Bloomberg reports.

Current trends indicate that the spread between the London inter-bank offered rate (Libor) and the equivalent overnight index swap rate (OIS) is approaching the yearly high.

OIS refers to the predicted Federal funds rate over the time-period of a loan.

Libor for three-month loans is 0.88 per cent - just down on the 0.9 per cent record set on April 21st.

In turn, this is well up from the 0.24 per cent spread registered on January 24th - although down on 2007's high of 1.06 per cent, set in December.

A large disparity between Libor and OIS is indicative of banks' nervousness in advancing funds to each other.

This is, in turn, a key feature of the credit crunch - which has seen banks announce multi billion dollar write-downs due to their exposure the now-collapsed sub-prime sector.

Speaking to the news agency, Bulent Baygun at BNP Paribas commented: "Given the dynamics that have persisted in the past few weeks, it looks like there could be a little bit more room for an increase.''

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