Interbank dollar Libor and U.S. CP rates fall

By Ian Chua and John Parry

LONDON/NEW YORK (Reuters) - Short-term credit markets showed more signs of emerging from a deep freeze on Friday as banks again lowered the rates they charge each other for borrowing dollars and central banks across the world made the currency more easily available.

Meanwhile, the Federal Reserve's efforts to shore up short-term lending for companies and banks continued to build momentum in the critical commercial paper market with a programme the U.S. central bank launched this week.

The interbank cost of borrowing overnight dollars fell across the board, according to the latest Libor fixing from the British Bankers' Association, with the overnight dollar rate falling to 0.40 percent from 0.73 percent, well below the U.S. central bank's benchmark federal funds rate of 1.0 percent. Libor, or the London interbank offered rate, is the biggest global benchmark off which short term loans are set.

And in the U.S. interbank lending market, overnight federal funds traded at 0.125 percent, well below the target rate the Federal Reserve sets, signalling that money was becoming very cheap for banks to obtain. The Fed cut the target rate for fed funds by 50 basis points earlier this week to 1 percent, a low last seen in 2004, to ease conditions for borrowers that are struggling in the worst credit crisis since the Great Depression.

On Friday, the Fed lowered rates it will charge to buy top-rated, three-month U.S. commercial paper. The Fed said it would charge 1.60 percent for unsecured commercial paper, down from 1.74 percent on Thursday, and 3.60 percent for asset-backed commercial paper, down from 3.74 percent on Thursday.

"It's all playing in the right direction. The Fed has created a well thought out suite of options for the issuers and the buyers of short term paper," said George Goncalves, chief Treasury/TIPS and agency strategist with Morgan Stanley in New York.

"That is eliminating some of the uncertainties related to liquidity and in the process is opening up the markets," Goncalves added.

Sterling and euro rates were also generally lower across all maturities. Only overnight euro rates were fixed slightly higher.