The Bank of England was today deluged with demands for loans after banks tried to borrow nearly four times the amount on offer at the weekly auction. It is the highest figure requested since the regular auctions started.

UK banks bid for £50 billion, way above the £13.6 billion the Bank of England offered to lend institutions and repay in a week. Today's auction follows a £15 billion injection into the system earlier this week, which banks need to repay in three months.

As banks rushed for cash, sterling fell to a new low against the euro and declined to an 11-year low on a trade-weighted basis, which compares the pound to a basket of different currencies.

While the euro is strong at 80.38p, as the European Central Bank (ECB) keeps the eurozone interest rate unchanged at 4 per cent to combat rising inflation, the pound has weakened on concerns over the UK economy.

Compared to the ECB, which has not changed its interest rate since June 2007 when it raised borrowing costs to 4 per cent, the Bank of England has made three cuts since December last year, with the most recent a quarter point reduction a week ago.

Today's injection by the Bank of England helped to ease the London inter bank offer rate (Libor), which is the rate that banks charge to lend to each other, which fell from 5.92 per cent to 5.91 per cent.

However, Libor is still nearly one percentage point above the UK base rate of 5 per cent because banks continue to be reluctant to lend money to each other.

As a consequence, banks are passing on higher borrowing costs to their customers by upping the rates on certain mortgage deals.

Yesterday it emerged that the Bank of England is close to agreeing a plan to help ease funding in the mortgage markets.

It is understood that the Treasury will allow lenders to swap mortgage-backed assets for government bonds. The bonds can then be used by banks to borrow money from each other.

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