The Economy

Key Libor Rate Tops 1% for First Time in 7 Years

The benchmark rate for $350 trillion worth of financial products worldwide has risen nearly 0.40 percentage point over the past year.
Matthew HellerJanuary 4, 2017
Key Libor Rate Tops 1% for First Time in 7 Years

The global benchmark interest rate for trillions of dollars of corporate loans, credit cards and derivative contracts topped 1% for the first time since 2009 on Wednesday amid expectations of accelerating economic growth and inflation.

The London interbank offered rate (Libor) for three-month dollars was fixed at 1.00511%, up from Tuesday’s rate of 0.99872%. It was the highest level for the benchmark rate for $350 trillion worth of financial products worldwide since May 1, 2009.

Over the past year, Libor has risen nearly 0.40 percentage point, reflecting expectations for a global pickup in inflation and higher interest rates in the U.S. The Federal Reserve hiked rates last month for the second time in a year and other major central banks are nearing the end of a period of ultraloose monetary policy.

As Reuters reports, the central bank has also indicated it may raise interest rates up to three times in 2017 as the economy approaches full employment and inflation heads toward its 2% goal.

U.S. Libor forms the base for most leveraged loans, with companies agreeing to pay a fixed cost above the rate based on their creditworthiness.

“A Libor setting above 1 per cent will break through one of the so-called ‘Libor floors’ that gained widespread use after the financial crisis,” The Financial Times noted. “The floors, which guarantee Libor at a certain level and provide minimum returns for leveraged loans, were introduced to make the loan market more appealing to investors after Libor tumbled in 2009.”

According to Reuters, Libor’s rise was fueled by a recovery in oil prices and reduced fears about a global drag from Britain’s surprise vote to leave the European Union.

“Investors upgraded their outlook on business activity following Donald Trump’s victory in the U.S. presidential election, anticipating that a Republican-controlled White House and Congress would slash taxes, implement infrastructure spending and loosen regulations,” Reuters said.