To influence LIBIR, does the Bank buy or sell bonds?

[Harry Hood]

Question from McPlums:

Thanks buddy!

Re. LIBOR- I understand that it is the rate at which banks lend each other. I am wondering however what it is they are lending- is it central bank reserves (monetary base) or not?

When the Bank of England tries to change interest rates in the economy through 'open market operations' are they buying and selling government bonds specifically in order to influence LIBOR? If not, what metric do they use to gauge the success of their operations?

Mc, the Bank could do either, it depends on how they want to influence the rate. Selling bonds takes money out of the system and allows the market to set interest rates which influences inflation (lets the will of the market reign.) Buying bonds puts mobey into the market but allows the bank to keep rates at whatever they want, controlling the market and inflation. Central Banks buy bonds in bad times to control inflation risk.

Anyone else have a good answer for us?

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[mcplums]

Thanks buddy!

Do you happen to know what kind of money LIBOR refers to though- central bank reserves or normal money?

[Harry Hood]

Thanks buddy!

Do you happen to know what kind of money LIBOR refers to though- central bank reserves or normal money?

First, I missed typed - I meant to spell it LIBOR in the title.

Second, LIBOR is just the acronym for the rate used for Panel Banks to lend money to each other. Central Bank Reserves and "normal money" are all the same Pounds, no? The rate at which banks charge each other for loans must be lower than the rate they use when loaning to customers, otherwise they wouldn't be able to make much money (you can't make a profit if you don't sell your goods for more than they cost you.) The reason for the heavy focus and talk about LIBOR is that it drives all other interest rates in the UK. If LIBOR goes up, consumer rates will go up accordingly. The American equivalent is the Fed Funds Rate. Note that in the US the Central (or Federal) Reserve lending only happens as a last resort, this may be the same in the UK since banking systems are pretty similar.