Exhibit One
In February 2009, somebody claimed that until the credit crunch, the BoE base rate merely tracked 3-month sterling LIBOR with a one or two month delay, so I stuck the official numbers on a spreadsheet and posted the chart here (along with a chart comparing the two since 1978, which is even more striking), click to enlarge: 
I've not updated that chart since then because the base rate hasn't moved and 3-month LIBOR has bobbed between 0.6% and 1%.
We will never know, did the people setting the base rate track 3-month LIBOR, or did the people setting LIBOR accurately predict the base rate; or did they both base their rates on other factors, such as inflation?
Exhibit Two
The Daily Mail published a handy table yesterday comparing the base rate and CPI Inflation: 
As you can see, until late 2008, the base rate (and hence 3-month LIBOR) was quite simply CPI inflation plus about four per cent and no messing; that rule no longer seems to hold.
Now, if LIBOR used to be based on inflation expectations, we'd expect to see this at about nine per cent, but it's not, it's at one per cent. Which all strongly suggests to me that people deciding LIBOR anticipate the base rate rather than inflation, but we're still stuck with the old problem of causation and correlation.
Wednesday 19 October 2011
Base rate conundrum
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10 comments:
I saw something similar suggested on the debtdeflation blog about Australian rates:
http://www.debtdeflation.com/blogs/2011/08/05/de-mystifying-rba-setting-of-interest-rates/
Assuming "bank bill rate" is equivalent to LIBOR?
For determinants of historical interest rates look no further than:
http://www.shapesoftware.com/InterestRates/
although it's about the US.
I'd guess LIBOR/interest rates would be "discovered" by demand over supply for credit.
i.e. increasing the volume of credit would lower LIBOR.
AC1
QP, RA, I'll give those a read if and when I have time.
AC1, that's one view; so what are we looking at - massive over supply OF credit or total lack of demand FOR credit? The way Mervyn is talking, it's as if there were exactly the opposite.
Forsyte saga. Man of property. That well known treatise on Edwardian Property and morals. Soames Forsyte is quoted as saying 'That no Forsyte ever accepts less than 4% on his money'.
What goes around comes around.
I have another interesting graph courtesy of Scot Wids. I'll try and scan and post it.
But is Libor a 'market' rate any more than the base rate is?
L, it would appear that it isn't.
Yeah, my feelings eggsaktly. So, does anyone think that any 'interest rate' is a 'market rate' under the current state money settlement?
It might be that bond rates - that is Sovereign debt - rates are a market rate? And maybe that is the entire point of QE - to stop market judgements on what the 'base' rate needs to be. In which case QE is doomed to failure.
My own personal view is that QE is designed to help bondholders sell up and move their losses onto others.
AC1
AC1, if, by "others", you mean the taxpayer, then you are probably right.
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