Two of Britain's biggest mortgage lenders today defied the Bank of England by raising interest rates just hours before the official cut.

Nationwide building society and Alliance & Leicester put up borrowing costs as the monetary policy committee voted to reduce the base rate from 5.25% to 5%.

It underlined the crisis facing lenders in raising funds as the credit crunch leaves borrowing costs between banks well above official rates.

It also undermined the Bank of England's ability to control the cost of mortgages and, in turn, a vital part of the economy.

Tim Fletcher of financial analysts Baseline Capital said: "Today's decision is irrelevant as far as pricing for mortgage borrowers is concerned. The Bank has effectively lost control of retail interest rates, which have become decoupled from the base rate.

"Any change in the Base Rate is likely to have little or no impact on the cost of raising funds for lenders. Together with the need to control demand this cost will continue to dominate retail lenders' pricing decisions."

Libor, the interbank lending rate, barely moved today despite expectations of the rate cut. It fell from 5.927% to 5.924%, just a fraction of the quarter-point cut brought in by the Bank of England.

Nationwide, which also reduced rates on some of its mortgages today, blamed the high Libor rate for its decision to put up the cost of others.

"The cost of funding continues to be high, regardless of what is happening to Base Rates," said a spokeswoman.

One of Nationwide's biggest rivals reacted to its move with unconcealed surprise. "This shows the nation's biggest mortgage lender is far from being the cuddly organisation it claims to be. Everybody is raising rates at the moment but it is cack-handed to do it on the day of the MPC decision. It's almost like sending a two-fingered gesture to [Bank Governor] Mervyn King."

Official figures yesterday revealed that the average rates on two-year fixed mortgages for first-time buyers have jumped to a near eight-year high of 6.64%.

George Buckley of Deutsche Bank said lenders will not be able to reduce mortgage rates until the credit freeze thaws. There is pressure on lenders to do so but it is important to see what the true cost of funding for these lenders is. The true cost of funding is not Bank Rate. For some banks it is not even Libor."

With the Bank unable to cut rates too far or too fast because of the threat of rising inflation, economists urged it to increase funding to cash-strapped institutions to ease the liquidity crisis.

"They need to look at other measures, liquidity-based measures, to help the markets," said Buckley.

The Bank has already pumped billions of pounds into the money markets and will offer another £15 billion next week. However, it has been criticised for not providing as much funding as the US Federal Reserve and European Central Bank, which left rates on hold at 4%.

Capital Economics forecasts UK rates to fall to 4% this year and 3.5% next. "Interest rates need to come down considerably further," said Julian Jessop.