The key benchmark interest rate for banks to lend to each other has risen above one per cent for the first time since May 2009, in a long overdue sign of recovery in banking sector lending.
The three-month US dollar Libor (London Interbank Offered Rate) rose to 1.00511 after being fixed at 0.99872 on Tuesday, according to Intercontinental Exchange.
Banks raising rates indicates borrowing demand in the broader economy has improved. While there are 35 separate rates covering different currencies and maturities of loans, the US three-month is seen as the most important.
The symbolic rise signifies the turning tide of global interest rates, as an extended period of ultra-loose monetary policy comes to an end.
The rate also reflects increased expectations of economic growth, as banks feel able to charge higher interest on lending to other banks.
The steady rise in the rate over 2016 – after an extended period well below one per cent – can be attributed in part to the US’s slow economic recovery since the global financial crisis, allied with a rising interest rate from the US Federal Reserve.
The rate is also watched by central banks when setting their own interest rates. The Fed has indicated it could raise rates three times over the course of 2017 as inflation begins to move towards its two per cent target.
Libor is used as the benchmark rate for trillions of dollars of contracts across the global economy – from interest rate swaps to student loans, mortgages and corporate funding instruments. It is also vital for interest rate exposure hedging.
The benchmark rate came under intense scrutiny when it emerged various banks had manipulated the rate, which is fixed using submissions from various banks.