3-month Sterling LIBOR was today set at 4.49625pc, a massive 106.5 basis points lower than yesterday’s pre-cut print of 5.56125pc for the popular interbank lending rate.
The key interbank rate had been drifting lower since it peaked a month ago at 6.30pc, prior to the joint Central Bank rate cutting on October 8th. Fuelled by expectations of a 50 basis point cut yesterday, it had continued its downward trend having already started to baking in the expected Base Rate cut.
For existing borrowers, the impact of the lower LIBOR rate may still be limited. Whilst those with Base Rate or LIBOR tracker rate mortgages should see the benefit eventually, subject to the collar rules of their mortgages, the reductions in both the interbank rate and the Base Rate will mean nothing to those with fixed rates.
Those with Standard Variable Rate mortgages, estimated by the Council of Mortgage Lenders to be less than 10pc of mortgagors, will be at the mercy of their lender. Yesterday Abbey and Lloyds TSB said that they would pass on the full 1.5pc Base Rate cut to their Standard Variable Rate mortgagors.
It is for new lending where lower interbank rates are going to prove most important since it is the rate banks charge each other and, ultimately, charge consumers on their new loans and new mortgages which will influence, amongst other things, the strength of retail sales and the housing market.
However, despite the reductions in interbank rates, liquidity is unlikely to ease in the short term. In an environment of continued deleveraging, end-of-year balance sheet straightening and with a deepening recession in the UK and beyond, banks will not be falling over themselves to lend for some months yet. Even when they do, criteria will still be considerably tighter than pre-Crunch, limiting any potential upside in house prices for quite some time.
For now, mortgages are expected to remain tight. The secular bear in home ownership is expected to continue as the total number of mortgagors continues to contract. Even if Q2 2009 does see a nadir in nominal prices, and that is a big and unlikely if, growth in repossessions will continue for sometime after that. Bull trends in repossessions start before house prices peak and end several quarters after nominal prices bottom.
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