Further cut to LIBOR could stimulate market says Base

The continuing downward trend of LIBOR will have a bigger impact on borrowers than government initiatives predicts commercial lender Base Commercial Mortgages.

Mark Stephens, chief executive at Base, says LIBOR has recently fallen below 4%, which puts it within 1% of Bank Base Rate.

He says: “At the moment, the margin between the rates is still too great, but if the trend continues and the differential reduces to 10 or 15 basis points, then banks will be encouraged to start lending once more.”

He says if the Bank of England cuts base rate again, as it is predicted to do, then the gap between LIBOR and Bank base rate could diverge further.

Some leading economists are saying that it may be the final quarter of 2009 before we see the two rates start to realign themselves.

He adds: “A reduction in the LIBOR rate will probably be more effective in kick-starting lending than any amount of government initiatives.

“The truth is that not enough of the £487 billion package of guarantees, loans and share capital announced by the government in October has yet been used, which indicates that either the pricing or terms are not sufficiently attractive.

“Ironically, the more stringent capital adequacy rules and associated regulatory requirements of Basle 2 may have inadvertently created a funding straitjacket for banks.

He adds: “When these rules were created, no one envisaged the kind of economic turmoil we are currently experiencing.

“If these rules could somehow be relaxed then perhaps liquidity may start to be restored in the economy.

“This, combined with a reduction in LIBOR, would have a far more positive impact on the market than simply issuing hollow threats to banks to lend more or face the prospect of nationalisation.

“The sooner that small and medium sized businesses can have access to competitively priced funding once again, the better.”