In the current climate, it might have been expected that the Bank of England would remove any reference to a certain interbank rate from its official documents.
Not so. The minutes of the Monetary Policy Committee’s July meeting, out today, featured the following references to Libor:
Sterling funding market conditions had seemed to improve following the announcement earlier in the month of the creation of a Government and Bank of England Funding for Lending Scheme (FLS) and the activation of the Bank’s Extended Collateral Term Repo Facility (ECTR). Sterling three-month LIBOR had fallen by around 10 basis points since those announcements and market expectations of three-month LIBOR in six months’ time had fallen by around 20 basis points. Although the controversy surrounding the investigation into the manipulation of LIBOR had so far not had a broad effect on market prices or conditions, there was a risk it might do so in future.
It’s not at all obvious why the MPC continues to use Libor as its key gauge of market funding conditions. But what’s really interesting about the text above is that the MPC thinks there is a risk that the Libor scandal could raise borrowing costs, undoing much of the Bank’s good work in the process. Read more