The cost of inter-bank borrowing hit a three-month high today as the City braced itself for interest rate rises.

Libor, which measures how much banks charge each other for short-term loans, hit 5.95 per cent today. The measure is the world’s most widely tracked reference rate, with around $150 trillion worth of financial products priced off it.

Libor has been rising in recent months as banks become more and more reluctant to lend to other institutions. Experts attributed today’s rise to a change in market expectations on interest rates.

Earlier today, Bank of England figures showed that the British public expects inflation to double in the next year.

Francis Yared, rates strategist at Deutsche Bank, said: “Libor has been moved in this case by the level of interest rates that people are expecting. While it can also move following money market stresses, these have not changed significantly in the past day while interest rate expectations have.”

Jean-Claude Trichet, President at the European Central Bank, said recently that a small rate hike could happen as soon as July to anchor inflation expectations.

Laurence Mutkin, head of European interest rate strategy at Morgan Stanley, said: "People have been running from one side of the boat to the other where base rate expectations are concerned.

The market had been pricing in further cuts, but after the recent hawkish messages from central banks, the market now anticipates at least one base rate rise. We believe, though, that the Bank of England will actually keep interest rates steady until the end of this year, unless the economy performs significantly worse."

British Banker’s Association, which calculates Libor each day, said it will take steps to improve the Libor-setting process, and could begin a second fixing of dollar Libor once U.S. markets open.

Willem Sels, head of credit strategy at Dresdner Kleinwort, said: “The higher Libor and swap rates are caused by a combination of higher inflation and interest rate expectations, along with the hoarding of liquidity by banks and concerns about some brokers.”