Britons are facing more months of rising mortgage costs after the rate at which banks lend to each other unexpectedly spiked and lenders rushed to borrow £78.3 billion from the Bank of England, which had £13.7 billion on offer.

The three-month London inter bank offer rate (Libor), which is the cost of borrowing in the wholesale funding market, rose from 5.70 per cent to 5.84 per cent as banks reacted to yesterday's Bank of England quarterly Inflation Report that ruled out more interest rate cuts to curb inflation which now 3 per cent - above the Government's 2 per cent target.

Libor is now nearly a whole percentage point above the 5 per cent base rate, and today's surge sent sterling down against the dollar from $1.9446 to $1.9438.

Today's rise in Libor is the first increase since the Bank of England launched a £50 billion "special liquidity scheme" on April 21, aimed at reducing the rate of Libor by allowing banks to swap mortgage-backed assets and other securities in exchange for Government-backed bonds which could then be used as collateral to raise funds.

The Government hoped that a reduction in Libor would result in lenders cutting mortgage rates after a number of banks increased borrowing costs on home loans.

However, banks continue to flock to the Bank of England to borrow money, and today bid £78.3 billion for a total £13.7 billion that was made available in the weekly auction. Last week, lenders bid for £71.5 billion - far above the £15.3 billion the Bank of England put up for auction.

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