What economic measure does LIBOR being a benchmark indicate?

LIBOR, the London Interbank Offered Rate, serves as a critical benchmark for the cost of interbank lending. It represents the interest rates at which banks offer to lend money to one another on a short-term basis, typically for periods ranging from overnight to one year. This rate reflects the credit risk, liquidity, and overall economic conditions prevailing in the banking sector.

When banks assess their willingness to lend to one another, they consider factors such as the perceived risk of default by borrowers and current market conditions. LIBOR's role as a benchmark is crucial because it influences many financial products and contracts, including mortgage rates, derivatives, and other loans, by providing a transparent and standardized rate.

The significance of LIBOR extends beyond just interbank lending; it affects the cost of borrowing for consumers and businesses, thus having a broader impact on economic activity. However, its primary function is to serve as a measure of how much banks charge each other for loans, making the identification of this measure as the cost of interbank lending accurate.