Hope for borrowers as credit crunch shows first signs of easing

The interest rate at which banks are prepared to lend to each other in the City recorded its largest single-day fall since February 2003.

It follows massive injections of cash by the Bank of England and the European Central Bank over recent days in a bid to free up the frozen money markets.

The rate at which banks will lend sterling to each other for one month dropped from 6.49125 per cent to 6.29750 per cent.

The three-month rate eased from 6.38625 percent to 6.20563 percent.

The falls are significant because they will feed through to the rates at which banks are prepared to offer loans and mortgages to millions of ordinary borrowers.

About 1.5 million borrowers had been facing huge increases in mortgage rates next year as their fixed rate deals ended.

The so-called wholesale Libor rates had remained stubbornly high even after the Bank of England's official base-rate cut earlier this month.

There are also growing hopes that the Bank will cut the rate again in the new year after the publication of minutes showing that its monetary policy committee voted 9-0 to cut the rate to 5.5 per cent.

It is the first time since November 2001 that the committee was united in such a decision. Economists had thought two or three committee members would have opposed the cut.

David Brown, an economist at investment bank Bear Stearns, said: "With the MPC voting unanimously in favour or easing, a back-to-back cut should be on the cards for the January MPC meeting."

The world's central banks have flooded the global money markets with a total of $530 billion (£263 billion) this week, the biggest injection of liquidity ever recorded.

Earlier this week, the Bank of England injected £10 billion through an auction of three-month sterling but the biggest move has been made by the European Central Bank.

Over the past two weeks it has lent more than half a trillion dollars.

The world's money markets have been locked solid since the summer when the scale of the sub-prime crisis in America first became clear.

Banks have been nervous about lending money to each other, forcing up the interest rate at which it could be borrowed — and making it scarcer.

The credit crunch has already claimed the scalp of Northern Rock, which was unable to borrow on the wholesale credit markets and had to be bailed out by the taxpayer.