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By Chris Giles in London and James Politi in Washington

Published: March 25 2008 15:10 | Last updated: March 25 2008 20:36

Central banks’ efforts to ease strains in the money markets are failing to stop financial institutions from hoarding cash, stoking fears that the recent respite in equity markets may not signal the end of the credit crisis.

Banks’ borrowing costs – a sign of their willingness to lend to each other – in the US, eurozone and the UK rose again even after the Federal Reserve’s unprecedented activity in lending to retail and investment banks against weaker than usual collateral and similar action in Europe.

The continued friction in the money markets came even as stock markets were showing new signs of optimism in spite of fresh data from the US showing consumers at their most pessimistic for 35 years and house prices falling at the fastest rate on record.

In London, where the Bank of England has faced criticism for not being as proactive as other central banks, the three-month Libor rate was set on Tuesday at 5.995 per cent, its highest of the year. This is nearly 0.9 percentage points above the level investors demand for risk-free money, a spread nearly as high as that which led to central bank interventions in September and December.

The European Central Bank allocated €216bn ($337bn) in seven-day funds in its regular weekly operation on Tuesday – some €50bn higher than the amount it estimated would have normally been needed – at an average rate of 4.28 per cent, which was the highest since late September.

The Fed’s latest lending to banks under its Term Auction Facility was also in heavy demand, receiving bids for $88.9bn compared with the $50bn on offer, an excess of demand almost as great as the previous auction two weeks ago, before the collapse of Bear Stearns.

But equity markets ignored the continued stresses in the plumbing of the financial system, partly in the hope that they were driven by liquidity hoarding at the end of the financial quarter.

In Europe, the FTSE 100 gained 3.5 per cent, closing 193.9 points higher at 5,689.1, while the FTSE Eurofirst 300 rose 3.1 per cent to close at 1,266. In Asia, Japan’s Nikkei 225 closed up 2.1 per cent while the Hang Seng in Hong Kong rose 6.4 per cent.

The rises followed strong gains on Monday in the US after the revised JPMorgan offer for Bear Stearns. At the close, the S&P index was also up 0.23 per cent – its earlier gains pared by further evidence the credit crisis risks sending the US economy into a deep recession.

Consumer confidence crumbled to a five-year low in March, and US home prices experienced a record slide in January.

The Conference Board’s confidence index fell from 76.4 in February to a reading of 64.5 this month.

“Consumers’ outlook for business conditions, the job market and their income prospects is quite pessimistic and suggests further weakening may be on the horizon,” said Lynn Franco of the Conference Board. Except for a brief period in 2003 when the Iraq war began, the index is at its lowest level since the early 1990s.

The expectations index, which tracks consumers’ assessments of future conditions, fell from 58 last month to 47.9 in March, its worst reading since December 1973.

The collapse in US consumer confidence came as the S&P/Case-Shiller Index of US home prices showed a sharp decline in January. Home prices in 20 large cities fell by 10.7 per cent in January compared with the same period last year, a drop that was slightly worse than expected but marked an acceleration compared with a 9.1 per cent fall in December.

The slide in home prices – the biggest monthly drop on record – could damp hopes that the US housing market may be close to a bottom. Those hopes were raised on Monday when data showed that sales of previously owned homes rose for the first time in seven months in February.

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