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Cash rescue plan helps rates fall Cash rescue plan helps rates fall
(10 minutes later)
A surprise move by the Bank of England, the US Federal Reserve and three other central banks to inject cash into money markets has had an immediate effect.A surprise move by the Bank of England, the US Federal Reserve and three other central banks to inject cash into money markets has had an immediate effect.
The London Interbank Offered Rate, or Libor, fell to 6.514% from 6.627%. The rate at which banks lend to each other fell to 6.514% from 6.627%.
If the rate had not fallen, it was feared that banks would pass the costs on to consumers, making loans more expensive and slowing economic growth. There had been fears that if the rate, known as the London Interbank Offered Rate or Libor, remained high then this could lead to slower economic growth.
Banks have become nervous about lending money because of heavy losses linked to problems in the US mortgage market.Banks have become nervous about lending money because of heavy losses linked to problems in the US mortgage market.
'Cautious''Cautious'
As the year end approaches, financial institutions have been hoarding money to cover their potential losses, say bank analysts.As the year end approaches, financial institutions have been hoarding money to cover their potential losses, say bank analysts.
"Worries about liquidity at year end can become self-fulfilling," said Leigh Goodwin, bank analyst at Fox-Pitt Kelton."Worries about liquidity at year end can become self-fulfilling," said Leigh Goodwin, bank analyst at Fox-Pitt Kelton.
The analyst added that banks' fears are especially heightened this year because they "think it will be tight, so they are cautious and less inclined to lend".The analyst added that banks' fears are especially heightened this year because they "think it will be tight, so they are cautious and less inclined to lend".
Five central banks said on Wednesday that they would make $110bn (£54bn) available to banks in order to ease their concerns about losses and add liquidity to money markets.Five central banks said on Wednesday that they would make $110bn (£54bn) available to banks in order to ease their concerns about losses and add liquidity to money markets.
The move was seen as a way to improve investor confidence following market volatility as well as a step to boost liquidity. The move was seen as a way to improve investor confidence following market volatility, as well as a step to boost liquidity.
The lending rate for sterling was not the only rate to be lowered. Sterling's rate was not the only one to be lowered.
The three month dollar rate for US dollars fell to 4.99% from 5.0575%, while the rate for euros dropped to 4.9494 from 4.9525. The three month dollar rate fell to 4.99% from 5.0575%, while the rate for euros dropped to 4.9494 from 4.9525.
Though some analysts had expected rates to come down they said it would not happen until early 2008.Though some analysts had expected rates to come down they said it would not happen until early 2008.