The squeeze on liquidity is getting worse, rather than better, and yesterday's three-month Libor rate – the rate at which Banks lend to each other-of 6pc, has proved- if proof was needed- that the last cut in interest rates announced by the Bank of England has had little or no effect.

Homeowners are complaining that their variable mortgage rates are actually going up not down, blaming lenders of everything under the sun, but the simple fact is that if mortgage lenders themselves cannot borrow at less than 6pc (and often much more than this), they are hardly likely to lend money to anyone else for less.

Some of the smaller building societies cannot get funds at anything less than Libor plus 1.5 per cent (nearly 7.5pc), and it is this issue that will cause the greater long-term harm, in the view of many economists, rather than a short-lived hike in inflation.

Economies need confidence in order to grow and one of the pillars of confidence in the UK is the value of property. If the housing market grinds to a halt through lack of liquidity, then there would be only one direction for it to go - down!

In a market short of buyers' house prices will fall and with fewer people able to get a mortgage, unless The Bank of England pumps more money into the system then we could be heading towards this scenario.

Until now the Bank has given the impression that if it does nothing for long enough then, the problem will sort itself out. Well, the credit crunch hit last August and the problems are still with us. Fortunately yesterday Mr King
pledged to pump more cash into money markets to try and restore confidence in the UK's financial system amid the credit squeeze.

The promise comes after the Bank put an extra £5bn into the market last week.

Mr King also predicted that house prices would be "broadly stable" over the next few years, which he welcomed. He said that a slowdown in the housing market would eventually make houses more affordable for first-time buyers, as the ratio of wages to house prices returned to more normal levels.

Activity and prices had continued to weaken in both the residential and commercial property sectors, he added.
"That stems in part from the continued tightening of credit conditions reflecting the turmoil in financial markets," Mr King said.

He told the Treasury select committee that the global financial crisis had "moved into a new and different phase".

"Across the world, confidence in financial markets is fragile. It is not that banks, at least in the UK, have made loans that are likely to result in unsustainable losses," he said.
"The heart of the problem is not in the real economy. It is in the financial sector itself."

Uncertainty about the strength of banks' financial positions has grown because of their difficulties to secure funding against assets they hold, he said.
Despite the billions being pumped into money markets, the Libor rate remains high.
Mr King said that it was a "matter of concern" that the efforts by central banks had so far failed to stem the problem.

The Bank of England would continue to offer extra money in the markets as a short-term way of boosting confidence in the system, he added.

However he said that longer-term solutions would be discussed with UK banks.

Perhaps there is some light now at the end of the tunnel?