Mortgage rates will continue to rise and may not return to the low rates seen last year, despite the banking sector bailout announced this week, lenders told the Chancellor yesterday.

They welcomed the Bank of England's £50 billion facility intended to free-up lending between banks, but in a private meeting at 11 Downing Street they said that the Bank would need to commit billions more in funding before the wholesale money markets functioned properly again.

This came as hopes of further cuts in interest rates were dealt a blow when a Bank of England official suggested that the Bank's ground-breaking scheme would reduce the case for lowering rates.

Tim Besley, an external member of the Bank's Monetary Policy Committee who is seen as its arch-hawk, said that the scheme to ease funding strains on banks “should allow the MPC to stay more focused on its task of using monetary policy to target inflation”.

There was little sign yesterday of any easing in the persistent money market stresses.

The key three-month sterling Libor interest rate for lending between banks edged lower, but only by a fraction.

Michael Coogan, director-general of the Council of Mortgage Lenders, said that it would take time for the changes to feed through into the money markets, but that Libor rates should start to fall in the coming months.

He gave warning that mortgage rates were unlikely to follow suit. “It's more likely that [they] will continue to rise in the short term.”

Mr Coogan also said that lenders were unlikely to offer home loans with rates lower than the cost of wholesale borrowing, as they did last year.

Mortgages for more than 100 per cent of the value of a property were also unlikely to reappear, he added.

Mr Darling and mortgage chiefs also called on each other to do more to help borrowers who fall behind with repayments.

Lenders pledged to initiate repossession proceedings only as a last resort and agreed to provide indebted customers with more information about where to go for help and advice.

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