Banks are continuing to increase mortgage rates despite expectations that the Bank of England will cut the base rate by at least a quarter-point today.

Alliance & Leicester is to increase its fixed-rate deals on Friday by between 0.2 and 0.3 percentage points, three days after it increased rates on the same deals by up to 0.35 points.

Woolwich announced that it would no longer offer two-year fixed rates to borrowers who do not have a 10 per cent deposit, effectively excluding first-time buyers. These homeowners will be forced to take out a deal that ties them in for at least five years if they want a fixed rate for more than 90 per cent of the property value.

The cost of loans fixed for five and ten years, which have become more popular as a result of the credit crunch because they are more secure, has also started to rise. Co-op bank increased the rate on its five-year fixed rate by 0.45 percentage points, while Woolwich raised the rate on a ten-year fix from 5.29 per cent to 5.59 per cent.

Experts blamed the soaring cost of Libor, the rate of interest at which banks lend to each other, for the sudden flurry of price rises immediately before the MPC’s decision. They gave warning that deals were likely to become more expensive still as the liquidity squeeze continued.

Yesterday the Government set up a working group, headed by Sir James Crosby, former chief executive of HBOS, to tackle the funding shortage in the mortgage market.

Abbey stopped selling 100 per cent loans on Monday, and Bristol & West temporarily withdrew from the mortgage market this week. Halifax, the UK’s biggest lender, effectively shut out first-time buyers with small deposits last week by announcing that it would now reserve the best rates for borrowers who own 25 per cent of the equity. Bank of Ireland said last night that it was pulling all mortgages from sale at 5pm today. Simon Tyler, managing director at Chase de Vere Mortgage Management, a broker, said: “For lenders, the cost of borrowing from each other has moved from around 20 points above Libor to approximately 120 points above. Demand from borrowers continues to outstrip supply whatever the rate, so if base rate was to fall, rates will continue to rise to try to stifle demand as lenders have little money to lend.”

Melanie Bien, director of Savills Private Finance, the mortgage broker, said: “This illustrates that the connection between interest rates and mortgage rates has softened considerably and further reductions in base rate will not necessarily mean lower rates on new mortgages in coming weeks. Indeed, if liquidity problems continue, mortgage rates may potentially edge rather higher.”

Borrowers were thrown a lifeline after HSBC said yesterday that for five weeks it would match the rate that any remortgage borrower is on to prevent a payment surprise when they come off their existing deal. However, the offer comes with a high fee of about £1,000 that could cancel out the low rate and it is not open to borrowers with deposits of less than 20 per cent of the property value.

HSBC said that it could offer the deal because it obtains most of its funding from retail deposits and so has not suffered from the lack of liquidity that has plagued other lenders. Defaqto, the information analyst, said yesterday that as the funding crisis deepens, some lenders have stopped selling mortgages through brokers and will now only offer loans directly, making it harder for borrowers to find deals.

David Black, a Defaqto analyst, said: “The reduction in supply of mortgages will mean that people seeking mortgages will have to carry out more extensive research into what is available. Whereas before the credit crunch, mortgage lenders sought out borrowers, now the boot is on the other foot.”