Authorization

Libor-OIS gap narrows but US rate hike plans remain at risk

A narrowing in the Libor-OIS spread, an indicator measuring stress in the financial system, has soothed concerns of an imminent global credit squeeze. But economists are warning that “stealth tightening” could derail the Federal Reserve’s rate hike plans.
The spread, a gauge for short-term borrowing costs, hit its highest level since the financial crisis in March after it more than doubled since the start of the year to just under 60 basis points.
It has since started to gradually decline back towards levels seen last year. However, economists believe that an elevated spread could still hamper the Fed’s plans to tighten monetary policy.
Libor-OIS gap narrows but US rate hike plans remain at risk

Technical factors are thought to have caused the recent surge in the spread
The Overnight Indexed Swap (OIS) is a proxy for the market’s expectations for the Fed’s interest rate. The London Interbank Offered Rate (Libor) tracks how much banks are charging each other to lend. Thus, a wider spread indicates that it has become more expensive to borrow money. ING predicted that, despite the easing, the spread will hold above the 40 basis point mark this year. The spread is currently at 52 basis points, well above last year’s levels.
Padhraic Garvey, head of global debt at the bank, warned that this could “act as an additional rate hike in disguise” and disrupt the US central bank’s hiking plans in the second half of the year.
The US central bank is expected to lift interest rates up to four times in 2018 amid buoyant economic growth in America and a decline in unemployment to its lowest level since 2000.
However, Mr Garvey said: “If the de facto stealth tightening due to the 25bp-plus rise in Libor-OIS since the start of this year does not reverse – and we expect it won’t – it could prove difficult for the Fed to deliver more than the total of three hikes still implied by the Fed’s median dot plot path.”
See also:
Leave a comment
News
  • Latest
  • Read
  • Commented
Calendar Content
«    Октябрь 2018    »
ПнВтСрЧтПтСбВс
1234567
891011121314
15161718192021
22232425262728
293031