Money-market rates climb to records

Money-market rates jumped to records and the Bank of England (BOE) relaxed borrowing rules for financial institutions as : “extraordinary” strains deepened the credit freeze.

The London interbank offered rate, or Libor, that banks charge each other for three-month loans in dollars increased to 4.33 per cent, the most since January, the British Bankers’ Association said. The corresponding rate for euros climbed to a 5.33 per cent, an all-time high. The Libor-OIS spread, a gauge of cash scarcity among banks, widened to a record and Asian bank rates climbed to the highest levels in at least nine months.

“It feels like the financial-sector problems are snowballing, developing momentum that will be hard to stop,” said Greg Gibbs, director of currency strategy at ABN Amro Holding NV in Sydney. “The further deterioration in term bank-funding costs and spread widening even as policy makers in the US are poised to pass a rescue bill is worrying.”

Central banks are stepping up efforts to revive lending by pumping money into the financial system. The US House of Representatives will consider a package of measures today that would remove tainted assets from bank balance sheets.

“In these extraordinary market conditions, the Bank of England will take all actions necessary to ensure that the banking system has access to sufficient liquidity,” Governor Mervyn King said in a statement in London today.

The Libor-OIS spread, the difference between the three- month dollar rate and the overnight indexed swap rate, climbed 16 basis points to 286 basis points today. It’s the third consecutive day the spread has risen to an all-time high. The average was 8 basis points in the 12 months to July 31, 2007, before the credit squeeze began.

Cash Auctions: The Bank of England will widen the range of collateral it accepts at three-month operations to make it easier for banks in the UK to get funds. The central bank said it will now accept top-rated securities tied to “some” corporate and consumer loans as well as asset-backed commercial paper with the highest short-term ratings.

“It’s another thing that shows how serious the situation is,” said Grant Lewis, an economist at Daiwa Securities SMBC Europe Ltd. in London.