The Fed's overnight lending rate is currently 5.25%, up from 1% two years ago.
The U.S. Federal Reserve confirmed widely held expectations, announcing it will leave its overnight lending rate unchanged at 5.25%.
The Fed slashed its overnight lending rate 50 points, to 1%, as expected on Wednesday, its lowest level since June 2003.
Yet again on Friday, the difference between the overnight lending rate and the 3-month interbank lending rate remained above 200 points, indicating this stress in the credit markets.
In the current money market conditions, where banks have to approach the central bank for borrowing, the overnight lending rate is in fact the key operational policy rate.
On Thursday, the European Central Bank cut its official deposit rate for overnight lending to the central bank by 50 basis points, to 1.0%, below its 2.5% benchmark rate, in an attempt to wean banks off the safety of its vaults and thus stimulate interbank lending.
The most the ECB has done to try and encourage more lending is cut its overnight deposit rate, in other words paying less interest on money it borrows from banks overnight.
The three-month Libor is at 3.77%, according to UBS, and the difference between that and the overnight rate suggests "interbank lending is broken, " said William O'Donnell, the head of U.S. interest rate strategy at UBS. Rather than extend credit for longer than overnight, banks appear to be hoarding cash.
The overnight dollar libor, which measures the rate of lending in dollars between banks, slid to 3.84% on Thursday, from its prior rate of 5.03% on Wednesday, the British Bankers' Association said in its daily update at midday Thursday in London.
The overnight London interbank offered rate, or libor, for dollar lending fell for the second day in a row, to 1.99% on Friday, from 2.68%, but the three-month lending rate increased to 4.33%, from 4.21%, the British Bankers Association said.
The Fed cut its target on federal funds, the overnight interbank loans that form the floor rate for U.S. lending, to just 0.25%, down 75 basis points from the previous 1.0% level.
The central bank keeps its eye on an overnight rate called Eonia, which is calculated by taking a weighted average of all overnight unsecured lending transactions between a pool of 43 of the most active banks in the Eurozone, along with four other international banks.
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