Bank steps in to offer £40bn loans

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Lenders are hiking mortgage costs because of a sudden surge in the rate at which banks lend to each other for three months, as those hit by the credit crunch hoard funds.

The Bank usually offers three-month money on a monthly basis, but will hold auctions every week from Monday for the first time while the pressures in wholesale markets remain.

The central bank has not revealed the sums involved in future auctions but they are likely to be of a similar size to Monday's if desperate banks snap up the funds.

The move comes as interbank three-month lending rates soared to 6.28% on Thursday - way above the Bank's official 5% base rate.

This spread is now wider than at the time of Northern Rock's emergency bail-out by the Bank of England just over a year ago, when three-month inter-bank rates were 1.15% above base rate.

The three-month rate is a key one for mortgage lending and HSBC, Barclays' lending arm the Woolwich, and internet and telephone bank first direct all said they were passing on recent increases in the cost of borrowing to customers.

Despite the Bank's auction, he said any progress on the 700 billion US dollar (£381 billion) banking bail-out in the US could have a bigger effect in easing money market pressure. "That is the more significant factor," he said.

Central banks including the Bank of England stepped up other efforts to ease the crisis.

The Bank is lending 30 billion US dollars (£16.2 billion) for a one-week period, with another 10 billion (£5.4 billion) being made available on an overnight basis.