Why Bank of England policymakers had to act to investigate LIBOR

By Costas Milas (Professor of Finance, Management School, University of Liverpool)

Usually The London Interbank Offered (LIBOR) rate follows the Bank of England policy rate, but this didn’t happen during 2007 – 9 due to the effects of the economic crisis, which meant that there was less liquidity in the economy and greater unsecured lending risk.

However, my research* with Professor Chris Martin (University of Bath) has found that during 2007 – 9, even with these unfavourable financial conditions are accounted for, the LIBOR rate was more than two thirds higher than it should have been and for this reason the Bank of England had to investigate this variation.

 *Martin, Chris and Milas, Costas (2010). The sub-prime crisis and UK monetary policy, International Journal of Central Banking, 6, pp. 119-144. Available here

Leave a comment