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In a report by the BBC, it emerged that the Bank of England suggested some banks to lower the Libor, around 2008. The Libor is normally set by commercial banks, and it is directly affecting mortgages and lending rates (more info here). As the BBC Radio 4 commentator said this morning, it is the "rate that really matters". However, the news is presented as a breach of authority, as it is not the competence of the BoE to manipulate the Libor. And yet, the BoE wants to affect short term interest rates to affect commercial lending! All this is a bit odd.

If this rate is so important, why is it not the Libor the key tool of monetary policy of the Bank of England? Why to bother with an "imperfect" tool like the rate of short term gov. bonds, and not set the Libor, for the whole range of maturities (as banks do), directly?

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  • $\begingroup$ LIBOR is supposed to be market rates of interest between commercial banks making voluntary unsecured loans to each other in various currencies and for various terms (or if they are not actually borrowing or lending the currency and term specified, an estimate). Since the Bank of England does not control these loans (not in £sterling, though it can have influence, and certainly not in other currencies), it cannot set the rates. $\endgroup$ – Henry Apr 10 '17 at 7:47

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