BoE's Salmon says Libor alternative will be ready next year

A senior Bank of England (BoE) official said on Wednesday that the central bank will outline how markets can move to a new “risk-free” interest rate benchmark from next year.

Chris Salmon, the bank’s executive director for markets, said the London Interbank Offered Rate (Libor), which indicates the interest rates banks charge one another, was still too prevalent after a number of traders were accused of rigging the rates.

However, the rates, which are determined by a panel of banks that report their estimated costs of borrowing capital from each other in different currencies and over different periods of time, remain the key reference for over £250bn of corporate loans.

Speaking to a conference hosted by the Association of Corporate Treasurers, Salmon indicated the banks overreliance on Libor rates exposed lenders to a risk.

“Users are looking to hedge the general level of interest rates, for which a near-risk free rate would be a more appropriate reference rate than Libor, which contains a bank credit risk component,” he said.

"The aim of this work is to transition a significant portion of new derivatives contracts to the alternative reference rate, moving to a world where Libor is used when it is appropriate to account for bank credit risk, but not otherwise.”

Salmon added that Threadneedle Street officials had made steady progress in their bid to develop a new risk-free interest rate benchmark.

"The working group has made good progress and I expect that a concrete timetable for making a reality of this change should become clear during the course of next year," he said.