Libor surges to dash mortgage borrowers hopes

The London Interbank Offered Rate (Libor) has seen a dramatic rise following a slew of negative news from the financial markets.

Yesterday the three-month sterling Libor rose by 0.04 percentage points to 5.84 per cent, completing a rise of 0.08 per cent in just two days.

The change cancelled modest improvements made in the past three weeks and dashed hopes of a fall in mortgage borrowing rates in the near future.

The rate had been falling in response to the Bank of England's special liquidity scheme, which could offer up to £80 billion a swap of mortgage-backed assets for Treasury bills.

The Libor acts as the benchmark rate used to price loans in the UK market – consequently a higher Libor equates to higher interest rates on commercial products.

As such the average interest rate charged on a two-year mortgage loan reached 6.64 per cent yesterday – the highest rate since 2000 - according to research from Moneyfacts.

During the recent financial turbulence the Libor has become detached from the Bank of England's base rate of interest, effectively nullifying one of the Bank's key levers of control over the market.

The developments follow news earlier this week from the Bank suggesting inflation could be about to increase sharply.

Bank governor Mervyn King admitted earlier this week inflation will stand at over three per cent for a number of months and economic growth will fall sharply.

Furthermore, Bank projections point to inflation staying over three per cent until 2009 – and will not return to two per cent until 2010.

As such the Bank's monetary policy committee can be expected to focus on inflation, rather than cutting rates to boost the economy – adding further woe to already stretched consumers.

Chris O'Toole