The odds on an interest-rate cut next week shortened yesterday after lenders told the Bank of England that the mortgage famine would get worse.

According to the quarterly Credit Conditions survey by the Bank, lenders plan to reduce their loans to consumers and companies over the next three months, increase their charges and demand more concessions, such as higher deposits. They also expect more borrowers to default.

Economists said that the news made a quarter-point cut in the base rate to 5 per cent significantly more likely. Forty-eight out of 63 economists polled by Reuters expect a cut.

Meanwhile, the International Monetary Fund said that the British property market was among the most exposed to a slump because of the scale of the property boom over the past decade. It identified Britain, Ire-land, France and the Netherlands as the countries most vulnerable to painful falls. Its study concluded that at least 30 per cent of the value of homes could not be explained by fundamental factors such as income or demand. A crash could have severe repercussions for the wider economy.

Lenders have been rushing to pull mortgage offers and tighten terms because the credit crunch has curbed their ability to raise funds.

Woolwich, the mortgage arm of Barclays, increased rates on its lifetime tracker mortgages yesterday by between 0.55 per cent and 0.70 per cent, depending on the sizes of loans. A rise of 0.55 per cent on a £150,000 interest-only mortage would increase repayments by £68.75 a month.

C&G, owned by Lloyds TSB, said that those wishing to borrow £1 million would have to put up deposits of £200,000 rather than £100,000.

First Direct, Lehman Brothers and the Cooperative Bank have already either had to withdraw from the market or withdraw their most popular rates.

The shortage of liquidity was emphasised again yesterday as banks bid for twice as much as the £13.4 billion of short-term loans offered in the latest Bank of England auction.

Lenders also plan to reduce unsecured credit – personal loans and credit card debt – over the next three months, the Bank said. That could hit the most stretched householders, who appear to be resorting to unsecured borrowing as other sources of credit dry up. Figures on Wednesday showed that new unsecured personal borrowing rose from £900 million to £2.4 billion in February.

In another worrying trend, banks reported being wrong-footed by the speed at which corporate customers were failing to meet interest bills on loans. Default rates by medium-sized and large companies “picked up more sharply than expected over the past three months”, the Bank said. Default rates were expected to rise further in the next quarter.

Philip Shaw, an economist with Investec, said: “The situation has deteriorated further and that’s consistent with the news over the past few days that mortgage lenders have been raising their rates and withdrawing products. Overall we feel that there is a very strong case for rates coming down next week.”

Activity among services companies slowed to its weakest for four months, according to a survey of managers by the Chartered Institute of Purchasing and Supply.

The data showed that the volume of outstanding business shrank and new business slowed. Service companies’ cost inflation rose to its highest level since 1996. The survey’s measure of prices charged by services groups did ease back a little, but remained high and will do little to ease the Bank’s inflation concerns.

Mortgage applicants face long delays as lenders deal with a backlog of applications by those coming to the end of cheap deals.

Brokers said that borrowers could miss out on good deals as lenders withdraw offers suddenly. They said that anyone who had just an “agreement in principle” and did not apply immediately for the loan faced “a very strong likelihood” that the rate would not be available the following day.

Rob Clifford, of the broker Mortgage-force, said: “Can you rely upon a quote from a lender? The answer is no. Lenders are not obliged to honour quotes and could elect to reject all applications or offer less attractive deals. Consumers haven’t got a cast-iron deal unless they have received a formal mortgage offer from the lender.”

David Hollingworth, of London & Country, said: “We are working extended hours to get applications through before rates are withdrawn. Whereas borrowers used to be able to go away and mull over a mortgage offer before deciding to apply, the danger is that now they cannot afford to do that, as a rate available on Friday could be gone by Monday.”

The Bank of England’s Monetary Policy Committee gathers for its monthly meeting next Wednesday and announces its base rate decision at noon on Thursday.

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