The cost of three-month dollar loans between banks rose Tuesday amid ongoing worries about the financial sector's health despite a reassurance from Citigroup Inc. that the ailing U.S. banking giant had got off to a solid start in 2009.
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 1.33 percent, despite a leaked memo from Citigroup chief executive Vikram Pandit. In it, Pandit said Citi had an operating profit of $8.3 billion before taxes and special items in the first two months of the year, its best performance since the third quarter of 2007.
Dollar Libor rates have pushed higher over the last few weeks despite a run of policy initiatives from the Obama administration as concerns about the state of the U.S. economy and its entire financial system continued to weigh on investor sentiment. As recently as mid-January, the Libor rate stood at 1.08 percent.
The rate for three-month loans in euros _ known as the European Interbank Offered Rate, or Euribor _ decreased around 0.02 percentage points to 1.69 percent following last week's half percentage point rate cut to 1.5 percent from the European Central Bank.
The equivalent three-month Libor rate for pounds was down 0.02 percentage points at 1.91 percent after the Bank of England cut its main rate by a half point too to 0.5 percent.
Interbank rates are important because they affect the cost of loans in the wider economy, for both businesses and individuals. Rates have been high during the financial crisis as banks have hoarded cash and worried that other lenders might collapse and not pay them back.
Though the interbank lending rates have fallen from previous highs in the wake of large interest rate cuts around the world and central bank liquidity provisions, all three rates remain above the levels markets think benchmark interest rates will be in three months.
While the U.S. Federal Reserve cannot cut its benchmark rate further from its current 0 to 0.25 percent range and the Bank of England is expected to keep rates on hold for a while yet, the European Central Bank is tipped to reduce its main rate at least to 1 percent.