Gordon Brown faces a showdown with banks this week after they accused him of deliberately distorting the arguments over interest rates.

The Prime Minister insisted on Friday that the big high street lenders follow the 1 percentage point base rate cut announced by the Bank of England on Thursday. But his comments have angered the leading banks, which have authorised a public assault on the Prime Minister, in spite of the £600 billion lifeline to the industry by Mr Brown in October.

The head of the British Bankers’ Association (BBA) will tell the Government today that it is ignoring the plight of hard-pressed banks and giving borrowers false expectations of cheap loans. In a direct challenge to Mr Brown, Angela Knight, the BBA’s chief executive, said: “Many who call on banks to ‘pass it on’ are unaware of these issues; others, for various reasons, choose to ignore them.”

The banks say that they cannot pass on the full cut because the cost of borrowing has not fallen on the wholesale money markets, where they borrow.

Writing in the Sunday Telegraph, Ms Knight said that comments, such as those by Mr Brown, were of no help to borrowers: “It does nothing for savers, either, many of whom are retired and rely on their savings.”

Ms Knight concluded her remarks with a direct appeal to the Government to stop laying the blame for expensive lending at banks’ doors. “When it comes to the banks, it might be uncomfortable but we would do better to understand a little more before leaping to instant condemnation.”

Lord Mandelson, the Business Secretary, will hold talks today with the Small Business Finance Forum, which consists of the five leading banks, the BBA and the Federation of Small Businesses (FSB), to discuss business lending. Alistair Darling, the Chancellor, and Lord Mandelson will meet members of the lenders’ panel tomorrow.

HSBC said yesterday that it would make £1 billion of extra funding available to Britain’s small businesses and increase its planned UK mortgage fund to £15 billion in 2009, a 20 per cent increase on 2008. However, a spokesman for the FSB said: “While we welcome HSBC’s move, we need to see it trickle down to branch level, where managers are consistently refusing credit.”

The FSB singled out Barclays for failing to produce measures to help small businesses since the start of the credit crisis.

It said that 30 per cent of small businesses had reported an increase in the cost of finance in the past two months and that almost 40 per cent of 5,000 members canvassed were thinking about closing down.

Figures from Companies House released today show that company start-ups have plummeted also to their lowest level since the dotcom crash in 2001. Just over 23,800 companies were founded in November, a 34 per cent decline on two years ago.

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