Inter-Bank Lending Rates Hit Monthly Low

The lending rates between banks in the U.S. and Europe dropped to the lowest levels in a month Tuesday as credit markets continue to improve.

The rate on three-month loans in dollars - known as the London Interbank Offered Rate or Libor - has slumped 0.23 percentage points to 3.83 percent, the lowest since Sept. 26 and the first time it has dropped under 4.00 percent since Sept. 29.

Another rate, the European Interbank Offered Rate for three-month euro-denominated loans has fallen 0.03 percentage points to 4.968 percent.

That is the first time the euro rate has dipped below 5.00 percent since Sept. 18, when it shot higher after U.S. investment bank Lehman Brothers collapsed.

Interbank rates such as Libor are important because they affect the cost of loans in the wider economy, for both businesses and individuals. They skyrocketed in recent months as banks worried that other lenders might collapse.

After massive intervention from governments and central banks - which included trillions of dollars worth in bank debt guarantees, pledges to rescue ailing banks, liquidity injections by central banks and a coordinated rate cut - that worry is slowly fading.

The greater confidence in the financial sector is reflected in gains in stock markets, with most countries' indexes higher today.

Skeptics note that while the improvements in the credit conditions are significant, the rates remain far above their benchmarks, set by central banks, at 1.50 percent in the U.S. and 3.75 percent in the euro zone.

Worries about the fallout from the financial crisis, both for economic growth as well as for companies' already strained balance sheets, are expected to keep credit conditions tight for months to come.

But while the lending rates remain at extreme levels, they are at least going in the right direction - down, said Daragh Maher at Calyon.

"For markets conditioned to grim news, any improvement is welcome, and helps support optimism that the global policy intiatives in place will slowly begin to revitalize the financial system," said Maher.