Economists called the end of the credit crunch yesterday as the short-term interest rate that banks charge to borrow from each other fell to a record low on dollar, euro and pound-denominated loans.

The continuing decline in the London interbank offered rate (Libor) signalled a return to normality for the credit markets for the first time since May 2007, according to Peter Chatwell, an interest rate strategist at Calyon, the investment banking unit of Crédit Agricole. “This marks a return to normal territory and gives us hope that we can cope with anything that comes now. It indicates that the banks are well capitalised, with no more surprises. It gives us hope that we have a functioning banking system and that we can now go about the job of running the broader economy,” Mr Chatwell said.

David Buick, of BGC Partners, said: “The trust is returning. This is very encouraging.”

Mr Chatwell takes his comfort from the Ted spread, a key measure of banking confidence defined as the difference between the interest rate charged on US treasuries and the dollar Libor rate. It fell to 62.47 basis points yesterday, its lowest since August 2007, when the credit crunch kicked in and the Ted spread soared.

“A spread of 62 points equates with the upper boundary of normality,” Mr Chatwell said. The spread ranged from 20 basis points to 62 basis points between December 2005 and May 2007 - the period of stability before the credit markets lurched.

In a further sign that the economy could be returning to normality, the Vix index — a key measure of share-price volatility in America — fell by 6.85 per cent to 30.83 in early afternoon trading. It stood at 55 in March.

The improvements in the American, European and British credit markets came as the pound rose to €1.1335, up 0.93 cents. Sterling also rose just over half a cent to $1.5306. Libor fell by four points to 78.5 basis points for three-month dollar loans, by 1.8 points to 1.33 per cent for sterling loans and from 1.247 to 1.242 for euro borrowings. These are all record lows.

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