What is the LIBOR Rate?

In the United Kingdom, the LIBOR rate is an important reference rate that is based on the rates of interest currently applied to loans extended to other banks in the greater London money market. Properly known as the London Interbank Offered Rate, this reference on interest rates is utilized for a number of different types of loan transactions between banking institutions.

There are several financial instruments that are considered in the calculation of LIBOR rates. Among these are variable rate mortgages, floating rate loans, and short term futures contracts. The current activity regarding some foreign currencies, notably the United States dollar and the Euro, are also considered in determining the daily status of the LIBOR rate.

The British Bankers Association provides a daily update on the current LIBOR rate. The information is normally released sometime between 11:00 a.m. and noon UK time, Monday through Friday. Data from sixteen different banking institutions is used to calculate the daily figure. Based on interbank deposit rates, the data is combined and then averaged in order to determine the current daily LIBOR rate.

It is not unusual for financial analysts to make use of the LIBOR rate as a means of determining the current strength of the GBP in comparison to other major currencies around the world. Understanding the relative strength of the UK currency in the world market can impact the level of confidence in the economic security of the country, and in turn impact interest rates on both interbank loans and consumer loans.

While the LIBOR rate is primarily associated with loans between banks, it is important to note that subprime adjustable mortgage rates are directly tied to the current status of the LIBOR rate. Because these types of mortgages may carry an interest rate that will adjust anywhere between one and four times per calendar year, borrowers would want to observe the shift in the LIBOR rate. This can help loan recipients who currently have a subprime adjustable mortgage rate to project the rate of interest that will be applied in upcoming periods.