Sterling borrowing rates between banks climbed to a nine-year high yesterday as leading central bankers sounded the alert on the fallout from America’s housing slump.

Jean-Claude Trichet, the President of the European Central Bank, said that the housing market woes in the United States were likely to drag down its growth rate. “There is a probability of fallout on the real economy in the USA,” he said.

Financial markets remained gripped by paralysis yesterday as the breakdown of lending among Britain’s banks showed no signs of improvement.

Three-month sterling Libor rates, the benchmark borrowing rate, rose slightly to 6.98625 per cent — the highest rate since November 1998, the British Bankers’ Association said.

A report by Morgan Stanley suggested that GDP growth in the UK could tumble next year, from a projected rate of 2.6 per cent in 2007 to 2 per cent in 2008, worse than previously forecast, as the credit crisis amplifies the weakness in consumer spending.

David Miles, its chief UK economist, said: “The scale of fallout now looks more serious.” He forecast that the Bank of England would cut interest rates by a quarter-point at the end of this year and by another quarter-point in the first half of next year.

In Europe, liquidity injections by the European Central Bank (ECB) have helped to bring down overnight euro rates, which fell to just above 3.5 per cent, below the official bank rate of 4 per cent.

However, John Hurley, Ireland’s central bank president, said that there was now a “high level of uncertainty” about the favourable economic outlook for the eurozone.

The ECB projects that the 13-member bloc will grow by 2.5 per cent this year and 2.3 per cent in 2008.

Mr Trichet, speaking after chairing a gathering of central bankers in Basle, Switzerland, said that it was “no time for complacency”.

“We will have to follow very carefully what happens, particularly in the USA,” he said. “The Fed has said that there was a probability of fallout on the real economy in the US.”

The chances that the US Federal Reserve might have to slash interest rates grew sharply last week after non-farm payrolls data revealed the first drop in employment levels for more than four years, caused by a slump in the construction market, weakness in the manufacturing sector and layoffs across leading mortgage firms.

Analysts gave warning yesterday that the fall in American house prices would soon start to affect the very wealthy as well. Charles Dumas, of Lombard Street Research, said:

“Already, lower-paid people have been getting pay increases barely above inflation for years, and will suffer most from the new jobs famine.

“But at the top end, to add to the bid vacuum in many upscale second-home locations, we now have a probable sharp drop in bonuses — on top of the collapse of real estate commissions already occurring,” he said.

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