Central bank-set interest rates are tumbling, but interbank lending rates – the interest rates banks charge each other on borrowed money – continue to soar as financial conditions around the world deteriorate.

The three-month London Interbank Offered Rate, known as Libor rose 7 basis points to 4.82% Friday - its highest level since December last year. Libor stood at 2.81% one month ago. The recent surge comes despite the best efforts of world governments and central banks to quell the financial market turmoil. Central banks including the Bank of Canada and the U.S. Federal Reserve grouped together to cut their benchmark rates by half a percentage point yesterday in an unprecedented mass move.

But bank lending rates continue to surge as financial institutions hoard their cash to protect themselves from getting entangled with collapsing institutions. That makes the liquidity on the market extremely valuable and increasingly expensive.

Libor is the best guide to global interbank rates because it impacts US$360-trillion worth of financial products worldwide. It is also set on a daily basis. As a result, the world’s banks use Libor as a reference when determining their lending rates. With less cash available on the market at a higher cost, the impact is filtering down to businesses and consumers. Not only is it now harder to get a loan, but Canada’s commercial banks yesterday each decided not to pass on the full half a percentage point rate cut to consumers. (Read Thursday's story)

Banks each cut their prime lending rate by a quarter of a percentage point to 4.5%, which now sits below the 4.75% it costs them to borrow according to the Libor rate.