The London Interbank Offered Rate (LIBOR) and UK construction industry output 1990-2008

The aim of this research is to answer whether or not wholesale interest rates, such as the London Interbank Offered Rate (LIBOR), can be used as an effective policy instrument to influence construction output. Developers and contractors borrow to finance construction and are charged retail interest rates, determined by the lending bank. The study investigated the relationship between LIBOR and construction industry output.

The study identified two time series, LIBOR and annual construction output and a number of regressions were run using the first differences to observe whether a change in LIBOR alone had a significant influence on construction output lagged by one to four years.

No significant relationship was found between changes in LIBOR and the annual change in construction output, regardless of the number of years lagged.

The policy implication of this research shows that control of demand for construction by government using wholesale interest rates is unlikely to succeed. Banks' lending to developers depends on other factors, such as retail interest rates, risk management and expectations.

The value of this research is that it supports the view that government policy needs to focus on stimulating construction demand, using real projects rather than monetary policies, such as interest rate manipulation.