Banks start to trust again

The London interbank offered rate, or Libor - the rate at which banks are prepared to lend to each other - is dropping: today's three-month Libor eased from 6.21 per cent to 6.18 per cent.

Libor - which is used as a benchmark for many mortgage deals - is forecast to fall more steeply to 6.07 per cent next week when the Bank of England says it will make it easier and cheaper for banks to borrow money from the Government which should pave the way for more competitive new mortgage deals within days - a welcome boost for first time buyers.

Libor had been stuck at close to 6.3 per cent, despite last week's half-point cut in base rates by the Bank of England, because banks were reluctant to lend to each other in case the borrower went bust.

The bunged-up money markets have led some major mortgage lenders to increase the cost of their new tracker mortgage deals in recent days.

Today Lloyds TSB said it was increasing the cost of its mainstream trackers by between 0.3 per cent and 0.5 per cent and Barclays' lending arm the Woolwich raised its lifetime and offset tracker rates by 0.2 per cent.

Banks and building societies have also been criticised for not passing on the half-point cut to customers on their standard variable rates. So far only 23 banks and building societies out of 85 have said they will be reducing their standard variable rate.

A spokeswoman for Moneyfacts, which monitors all mortgage rates, said: "It usually takes a couple of weeks for the money market rates to filter through to mortgage rates."

Another encouraging sign has been an increase in the number of deals available to buyers with only a five per cent deposit.

However, market activity was rather less encouraging.

Shares in London fell sharply in early trading on fears of a global recession and last night's turmoil in Asian markets although they bounced back later.

By lunchtime the FTSE-100 was down 140.4 points at 3939.13 points, a fall of three per cent. That makes a 10 per cent fall over two days of 444.2 points.

Last night Asian markets suffered one of their worst ever trading sessions. Japan's Nikkei 225 Index lost more than 11 per cent, its second biggest one-day fall on record. The Hang Seng index in Hong Kong fell eight per cent, while markets in Australia, South Korea and Singapore were also heavily down. barrel of crude oil dropping to a 13-month low of around $71, half its July peak.

The Government's £37 billion bank bail-out was also causing concern today amid claims that its tough terms had been imposed by Brussels.

Lloyds TSB is lobbying Chancellor Alistair Darling to drop a five-year ban on paying dividends to shareholders because of fears that the draconian move will undermine the whole deal.

The City worries that Lloyds' plans to take over HBOS could be scuppered by plunging share prices in both banks and wants the Government to allow dividends to be paid after a year.

It was claimed today that the European Commission had forced the Treasury to impose the five-year ban as the price for winning its approval for the deal under EU competition rules.

Mr Darling is furious at attempts by the banks to bounce him into easing the terms but he said late last night that there was room for flexibility.

The Treasury and No 10 know that if private investors are put off by the tough terms of the bail-out it is more likely that the state will have to buy more shares in Royal Bank of Scotland, HBOS and Lloyds TSB.