THERE were more signs of gradual thawing in money markets yesterday in the wake of the UK’s biggest interest rate cut since 1981.

The rate at which banks lend to each other for three months – a key factor in pricing most mortgages – eased from 4.496 per cent to 4.421 per cent.

But this is still almost 1.5 per cent above the Bank of England’s official base rate, which now stands at 3 per cent after last week’s dramatic cut.

Although a host of lenders caved in to pressure on Friday to pass on the Bank’s 1.5 per cent cut, funding costs have remained stubbornly high as banks nervous of losses remain reluctant to lend to each other.

Investec chief economist Philip Shaw said: “Conditions in money markets are still extremely tense.”

These concerns are shown in the closely-watched spread between three-month interbank rates and overnight index swaps – a measure of where markets think interest rates will be in three months’ time.

With another 0.5 per cent rate cut already priced in, this spread currently stands at 1.92 per cent. Before the credit crunch struck in August last year, this measure commonly stood at 0.1 per cent. The nervousness – and hence high cost – of borrowing in interbank markets has meant lenders will find it more difficult to pass on cuts in the base rate.