Interbank lending rates surged today as banks scrambled to secure funding from the Bank of England, rather than from each other. The spiralling rates have forced several mortgage lenders to increase their home loan rates and HSBC today became the first big bank to announce rate rises.

The spread between three-month sterling Libor, a key rate in setting mortgage prices, and the overnight rate rose to a record high of more than 150 basis points.

Mark Capleton at Royal Bank of Scotland said this trend was being seen around the world. “It reflects acute nervousness as the US financial rescue plans make their way through Congress," he said.

HSBC is increasing mortgage rates by 0.3 per cent for borrowers who have a 10 per cent deposit in response to the soaring Libor rate. Yorkshire Building Society increased its rates by up to 0.4 per cent earlier this week.

But HSBC is cutting rates for borrowers with heftier deposits of 25 per cent or more. Following the change, which comes into force tomorrow, a two-year fixed rate mortgage for someone with a 10 per cent deposit will cost 6.27 per cent, while one for someone with a 25 per cent deposit will cost 5.79 per cent.

This change came as the Bank of England's weekly cash auction was oversubscribed by £36 biilion as banks shunned lending to each other in favour of the security of funds from the central bank.

They bid a total of £89.2 billion for £52.8 billion on offer at the Bank's auction as they find it increasingly difficult to borrow from each other.

The Bank was offering an additional £5 billion in one-week funds that it first offered last week but the appetite well exceeded demand.

Strains in the money market have reappeared with a vengeance in recent days with many banks refusing to lend to each other for anything longer than overnight.

Banks began using the Bank of England’s standing deposit facility last Friday for the first time in more than a year. They have continued to use it this week, although its deposit rate is lower than that of the interbank markets.

Money market strategists at Morgan Stanley said: “Systemic risks are extremely high, and the outlook appears bleak. Spot and forward Libor spreads are at all-time wides, Term lending markets appear almost to have closed, while cash hoarding continues.”

The yen equivalent of Libor soared this morning to a two-month high and bill swap rates in Australia rose to their steepest level since August as Asian markets reacted to growing fears that the US Congress may delay or dilute the $700 billion (£377 billion) plan to bail out the banking system.

Singapore's three-month dollar loan rate today surged 29 basis points to 3.684 per cent, to its highest rate in more than eight months, while the cost in local currency loans increased for a ninth day to 1.758 per cent.

Concerns over the bailout package and the cost to the US economy sent the dollar lower against the yen and the euro on Asian markets today, ending a two-day gain.

Remarks by Ben Bernanke, chairman of the Federal Reserve, on the "extraordinary stress" in financial markets meant that the dollar ebbed 0.4 per cent to 105.79 yen, while the euro strengthened 0.6 per cent to $1.4698.

The dollar's weakness also undermined oil and the price of London Brent crude edged up more than $4 to top $106 a barrel on Australian markets but later fell back in Europe to $100.30.

The dollar dropped against 13 of the 16 most active currencies. It is down 6 per cent against the euro, since touching a one-year high of $1.3882 on September 11. The dollar hit $1.6038 on July 15, the weakest level since the European currency made its debut in 1999.

Futures contracts indicate an 80 per cent chance that the Federal Reserve will cut its 2 per cent benchmark rate by a quarter of a percentage point next month. Earlier this week, futures markets put these odds at 58 per cent.

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