Crisis deepens as interbank cost of borrowing jumps

Lending rates between banks jumped tonight, and Barclays wrote off another £1 billion, in the latest signs the credit crunch is far from over.

Libor - the interest rate at which banks lend to each other - rose from 5.70% to 5.84% as banks reacted to yesterday's grim quarterly Inflation Report from the Bank of England, which all but ruled out further cuts in interest rates.

There was also a scramble for cash as banks rushed to borrow a staggering £78.3 billion from the Bank of England - far more than the £13.7 billion it had on offer.

Barclays revealed it lost another £1 billion in the first quarter as a result of the credit crunch. It refused to rule out a rights issue, saying it had "plenty of options" to strengthen its balance sheet.

The jump in Libor was the first since the Bank launched its £50 billion "special liquidity scheme" on 21 April, which was aimed at reducing the rate of Libor by easing funding constraints. It signalled a deepening of the credit crisis and economists warned it was likely to send mortgage costs higher.

The shocking news came soon after Barclays left itself open to a rights issue. Finance director Chris Lucas said: "People may be a bit disappointed that we are saying that we want to keep our options open. But the fact is that we don't have to do what some of our competitors have been forced to do. We have complete flexibility, we have the mechanisms and we have the time to get our capital ratios back to our target levels."

Barclays' shares fell 7¾p to 419½p, with analysts suggesting the bank was "in denial".

Lucas said the group's two key measures, tier one capital and core tier one equity, were now "slightly lower" than at the end of December, when they were 7.6% and 5.1% respectively. The bank's target levels are 7.25% and 5.25%.

Rivals have already launched massive rights issues, Royal Bank of Scotland seeking £12 billion, HBOS £4 billion and Bradford & Bingley's £300 million.