Interbank lending rates slip but many still hoarding cash

The strained money markets showed tentative signs of easing today in the wake of unprecedented global action to stem the financial crisis.

Three-month sterling Libor, the rate at which banks lend pounds to each other, fell from 6.249% to 6.21%. The dollar rate and euro rate also fell.

It came as the Bank of England, the European Central Bank and Swiss National Bank loaned financial institutions $254 billion (£145 billion) in their first injection of unlimited dollars into the money markets. Until today, such funding was limited by the central banks.

It also followed the Government bailout of banks across the US and Europe and last week's co-ordinated cut in interest rates around the world as the authorities stepped up their efforts to unlock the credit markets.

"Government participation in the banks along with the huge liquidity operation is flooding the financial system, which is having the desired effect on Libor," said David Keeble, head of fixed-income strategy in London at Calyon, the investment-banking arm of Crédit Agricole.

However, experts said interbank rates remain stubbornly high, given last week's emergency rate cuts.

Sterling Libor is a massive 171 basis points above the Bank of England base rate of 4.5% while dollar Libor at 4.55% is 305 basis points higher than the US Federal Reserve's 1.5%.

Banks are still scared to lend to each other and many are hoarding cash as a cushion against more shocks to the financial system.

"These developments suggest the market is reducing the odds of imminent financial Armageddon, but that significant year-end funding issues remain," said TJ Marta, strategist at RBC Capital.

Lou Crandall of Wrightson ICAP said: "Heightened concerns about counterparty risk may have been the major reason for the initial pullback from the term money markets last month, but investors' worries about their own liquidity exposure could make them slow to return."