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Interest rates start to rise

By Paul Hodges on 01-Jun-2008

Last month, I noted the suggestion by leading bankers that interest rates would probably rise by the end of May. The rationale for this view was that the bigger, stronger banks seemed to have got fed up with subsidising the rates being charged via LIBOR (London Inter-Bank Offer Rate) to weaker banks. And sure enough, LIBOR closed on Friday at 2.68%, well above the 2.0% rate set by the US Federal Reserve.

LIBOR may sound like an obscure part of the banking system, but it is the main benchmark for $347 trillion of global borrowing. So its rise will affect borrowers all around the world – both companies and individuals. Equally, government bond rates have risen between 0.2% and 0.5% during May in all the main financial centres, as investors worry about the impact of higher energy and food prices on inflation.

These higher interest rates are bound to slow demand for many chemical products. They will also make life more difficult for highly-leveraged companies.