No end to strain as banks' cost of borrowing rises

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Three-month sterling Libor, the rate at which banks lend pounds to each other, rose from 6.27% to 6.28% while dollar rates jumped to a year high of 4.75%. It came despite yesterday's emergency half-point cut in interest rates to 4.5% in the UK and 1.5% in the US, and showed that nervous banks still do not trust each other.

The significant widening of the gap between official rates and Libor underlined the ongoing strain in the money markets.

City analysts today said Gordon Brown's banking bailout plan was still short on detail, although shares in London rose as traders gave it and the rate cut a cautious welcome. The FTSE 100 index was up 57.28 at 4423.97.

David Buik of BGC Partners said: "When you have had a half-point cut in interest rates across the spectrum, you would expect in normal circumstances Libor to drop but we simply haven't seen that.

"The market is moribund, it just isn't happening. There is a lack of trust out there. It gives you an idea of the gravity of the situation."

The Bank of England cut rates from 5% to 4.5% yesterday in its first emergency move since after the 9/11 terror attacks in 2001.

It was joined by the US Federal Reserve, the European Central Bank, and central banks in Sweden, Switzerland and Canada as authorities around the world desperately tried to break the deadlock in the money markets and restore stability to the financial system.

However, Alessandro Tentori, an interest-rate strategist at BNP Paribas in London, said: "I don't see a wave of liquidity coming into the market. People are still holding on to their cash because there's still a great deal of uncertainty out there."

Cezar Bayonito of Allied Banking Corp said: "Interest rate cuts will be of little help in the near term because the issue is trust, not rates."

Overnight lending rates did drop as central banks continued to pump billions of dollars of liquidity into the system. Overnight sterling Libor fell from 5.83% to 5.42% while the dollar rate was down from 5.37% to 5.09%.