US dollar 3-month interbank lending rate edges higher as markets begin to price in Fed hikes

Dollar 3-month interbank lending rate edges higher

LONDON — The cost of three-month dollar loans between banks rose from record lows Monday amid growing expectations that the worst of the U.S. recession is over and that the U.S Federal Reserve may start to lift borrowing costs sooner rather than later.

The British Bankers’ Association said the rate on three-month loans in dollars — known as the London Interbank Offered Rate, or Libor — rose 0.02 percentage points to 0.65 percent.

Though the U.S. Federal Reserve is expected to keep its benchmark rate unchanged at a range between zero and 0.25 percent for a few months yet, the markets are beginning to price in the possibility that rates may start to rise by the start of next year if the recent improving economic dataflow continues.

However, many economists think the market’s expectations of tighter U.S. monetary policy are overdone and premature given the lack of near-term inflationary pressures in the pipeline.

“Markets have now moved to pricing in a U.S. rate hike by year end which we believe is wildly premature given the likely absence of inflation pressures for many months to come,” said Mitul Kotecha, an analyst at Calyon Credit Agricole.

The equivalent rate for three-month loans in euros — known as the European Interbank Offered Rate, or Euribor — rose 0.01 percentage point to 1.28 percent while the British rate was unchanged at 1.26 percent.

Interbank lending rates are important for the wider economy because they determine the cost of loans for households and businesses. They shot higher during the credit crunch but have been coming back down in recent weeks in the wake of massive efforts by governments and central banks to get lending going again.