Interest Rates - Where Next?Future Short-Term RatesThe London Interbank Offered Rate (LIBOR) is the "benchmark" or reference rate at which banks borrow funds from each other on the London interbank market. It is calculated daily by the British Banking Association (BBA) and reflects the market expectation for short-term interest rates. The LIBOR rates can be used to estimate the future BoE base rate. For example, on average the forward rates tend to settle slightly above the subsequent out-turn base rates by a small margin - a risk premium. This can be estimated from the historical data, (see Brooke & Cooper, 2000; Peacock, 2004, bibliography) and the predictions are plotted below (blue line). However, the credit crunch has greatly increased the risk premium to more than 750 bpts. However, although this forecast is a good indicator over the short term, the BoE base rate can change more rapidly than this indicator might suggest. Figure 1. Short-term interest rate expectations
based on the daily LIBOR repo rates.
Estimates based on offset data from Peacock (2004). Historical UK Interest RatesLatest change: reduced by 0.50 percentage points to 0.5% on 5th March 2009 
Figure 2. UK BoE repo rate and 3-month LIBOR (IUMAAMIJ) from 2000 to date.
Residential Mortgage RatesComparison of average monthly mortgage interest rates from UK banks and building societies. Note the effective dissappearance of both 2-year and 5-year fixed 95% LTV mortgages in recent months. Figure 3. UK residential mortgage interest rates from 2000 to date.
References
British Banking Association (BBA)
BBA - LIBOR and Daily Repo Rates |
See Also ... |
