Bank lending rate rises sharply

The interest rate at which banks lend money to each other has soared overnight to record levels, according to British Bankers' Association data.

The Libor rate for borrowing dollars overnight hit 6.87% - the highest for more than seven and a half years.

In normal conditions, the rate should be closer to the Bank of England base rate which is currently 5%.

The rise came despite huge cash injections by central banks after the rejection of the US bail-out plan.

Libor reflects how banks perceive the risk of borrowing money.

While central banks set official rates, Libor is seen to show the real rate of interest being used by the largest global firms to borrow from one another.

With banks still reluctant to lend to each other, it has been a key indication of the impact of the credit crunch.

Mortgage lenders in the UK have pointed to rises in Libor when increasing the costs of new deals, despite falls in the Bank of England's base rate.

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