Predicting Interest Rates With The LIBOR 10-year Interest Rate

Published: 16th August 2011
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LIBOR, which stands for London InterBank Offered Rate, is the rate London banks charge each other for certain types of loans. Being used as a standard for worldwide bank rates, LIBOR enables banks to define interest rates for mortgages.

Advantages and Disadvantages of Getting LIBOR Loans

Most people who get loans in the UK get LIBOR-based loans simply because these are by far the most widespread. What accounts for the popularity of LIBOR-based loans is the fact that they offer more options than loans which rely on different indexes. The chief advantage of LIBOR loans is that when rates slump, the index also slumps, allowing borrowers to save at times considerable sums.

Loans that are based on LIBOR do have some disadvantages. By far the biggest inconvenience is that whenever rates surge, the index also surges, meaning that borrowers can lose much money really quickly.

Predicting Rates

LIBOR rates cannot be accurately predicted, not even when the period considered is extremely short. At times a forecast may be given, such as that the rates are likely to increase in the short term, but to offer accurate figures is impossible, even for experts.

Predicting future interest rates based a current 10-year LIBOR interest rate is about as easy as predicting how the weather will be like in London ten years from now. When it comes to medium term, however, predictions may be attempted, and, even if they are rarely accurate, they may provide useful information.

LIBOR futures contracts change daily and show 5-year predictions on various currencies; they can be used as a reference point. With data from LIBOR futures contrasts various scenarios can be created, which shed light on how the LIBOR rate may change in the short term.

Long Term

As already stated, any good long term predictions are nearly impossible to obtain. However, by analyzing past interest rates it can be deducted when good or bad economic cycles and periods with high inflation are most likely to occur in the years to come. Again, there's a lot of guessing involved, but still, the results obtained may be useful. Usually, when the period analyzed is longer, i.e. 20 years +, the results tend to be more reliable.

It must be remembered that looking at past rates involves much speculation. Still, doing so can come in handy in creating scenarios for the future. For example, instead of attempting to come up with exact figures, one may create three types of scenarios, namely average, optimistic, and pessimistic.

In the end it should be remembered that using LIBOR 10-year interest rates to predict the future interest rates is only effective for obtaining general results. However, even these general results may be useful in that they can help one save money in the long run.

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