Central banks fail to halt hike in interbank lending rates

A FRESH surge in the rate at which banks are prepared to lend to each other was triggered yesterday despite the Bank of England and other central banks pumping billions of pounds into the financial system.

The FTSE 100 index of Britain's blue-chip stocks crashed to a three-year low as it became clear that the co-ordinated action had failed to ease market nerves rattled by the crisis among Wall Street's leading financial institutions.

There was also no boost to stock market sentiment from the Federal Reserve's meeting across the Atlantic as America's central bank decided to keep interest rates on hold.

In London, banks suffered a second day of woes, with HBOS diving 22 per cent to close at 182p and Royal Bank of Scotland shedding 10 per cent at 189.1p.

At one stage, the Footsie plunged below 5,000 points, before recovering to stand 3.4 per cent lower at 5,025.6.

The Bank of England injected an extra £20 billion into the markets, still frozen by the chronic credit crunch, with the injection being three times over-subscribed.

It was four times the amount the bank had pumped in on Monday, an offer that had been five times over-subscribed.

However, it could not stop the British Banking Association (BBA) London Interbank Offered Rate (Libor) in dollar terms more than doubling yesterday to almost 6.44 per cent from just over 3.12 per cent on Monday.

That is more than three times the official US interest rate of 2 per cent – and the highest the interbank rate has been since April 2001.

The sterling Libor rate also jumped yesterday, to about 6.79 per cent from 5.49 per cent on Monday.

"This is much worse than August last year," said one market source, referring to the day the credit crunch snowballed out of the US.

Padhraic Garvey, head of investment strategy at ING, said: "The banking crisis is not over and we have potentially a difficult few months to get through right to the end of this year."

The BBA said: "The Libor rate recognises that, in the current uncertain market conditions, banks are looking to their own liquidity as the priority.

"This is particularly reflected in the US dollar because of the well-known worldwide shortage of this currency."

From Sydney to Frankfurt, central banks injected billions of dollars of emergency funds.

"It's clear that this financial market crisis is the worst worldwide in decades – and it is not over," Germany's finance minister, Peer Steinbrueck, told parliament.

The European Central Bank pumped 70bn (£55bn) into money markets yesterday after 30bn on Monday.

Asian central banks also rolled into action, with those of Japan, Australia and India flooding money markets with cash.

The region's banks doled out $17bn, following the $70bn Federal Reserve injection in America on Monday.

The Dow Jones Industrial Average rose 141.51 points to 11,059.02 last night.

Financial shares, rebounding from their worst day ever on Monday, led Wall Street's gains.

And the broader Standard & Poor's 500 index was also up, rising 20.87 points, or 1.75 per cent, to finish the day at 1,213.57.

One analyst said of the Fed's decision to hold rates: "That's a bit of a disappointment as many in the markets were hoping for at least a half-point rate cut.

"However, it is possible the Fed thought that might send a message of panic given everything else that is happening on Wall Street at the moment."

Stock market strategists said nervousness remained high following the collapse of Lehman Brothers and the $50bn "rescue" takeover of Merrill Lynch by Bank of America.

The London market had closed before any news as to whether American insurance giant AIG will be bailed out by the US government or let go to the wall. One analyst said: "It is the next big bombshell waiting to drop and arguably could be more unsettling than Lehman because of AIG's far wider exposure to the wider US economy."

Oil prices dropped another 4 per cent on Tuesday, extending their steepest two-day slide since 2004 as mounting economic turmoil sent investors fleeing to safer havens.

The losses came despite US supply disruptions after Hurricane Ike crashed through the Gulf of Mexico last week and left a quarter of the nation's energy output idled. "People are getting out of commodities and getting into safer havens, like bonds," said Andy Lebow, broker at MF Global in New York.