The London interbank offer rate (LIBOR) that determines the price at which banks lend to banks, fell to its lowest level since the credit crisis began in August.

LIBOR has provided a key barometer of the intensity of the storm that gripped the money markets. It surged in August and September as revelations about banks’ losses on subprime US housing assets hit the light of day.

It fell after the US Federal Reserve took decisive action in September by cutting its interest rates and loosening rules on liquidity.

But as more banks reported subprime losses, LIBOR spiked again as it became increasingly unclear how large these losses were, and where they were sitting.

As of 10 January sterling LIBOR had fallen for 17 consecutive sessions, taking the rate for three-month money – the City benchmark – from 6.26 per cent to 5.68 per cent.

So far so good – money is cheaper. Businesses can thank central banks for this. The Bank of England cut its base rate to 5.5 per cent on 6 December and is likely to cut further as the economy slows.

Meanwhile the Bank, along with four other central banks, announced plans to inject liquidity into the money markets to ease the traditional year-end seasonal squeeze.

But as we all know, not all Christmas presents are glistening new iPhones; some are Aunt Ethel’s hand-knitted socks. The drop in LIBOR could be the latter.

Firstly, borrowing is still expensive. Measured as the gap between LIBOR and official rates, the current spread is 18 basis points or 0.18 per cent.

However, this is still near the level it was before the crisis broke, meaning monetary conditions have not eased to match a worsening economic outlook. The markets are betting on a rate cut in February and if that happens the gap between LIBOR and official rates will widen again.

The fact LIBOR rates have fallen from their eye-watering peaks in September is good news but given the headwinds facing the economy, they should be lower. The fact they are not implies markets are still worried.

Secondly, it would not take much – fresh losses from a blue chip bank or rumours of a new Northern Crock – for LIBOR to spike, just as it did in October.

Thirdly, higher LIBOR rates are already hurting the economy. Around 60 per cent of the stock of corporate lending is on variable rates, meaning increases in three-month LIBOR rates feed through quickly into the rates companies pay.

Lastly, and most importantly, banks’ attitudes may have changed dramatically. Bank managers fear the worst for their clients.

A survey of credit conditions by the Bank of England in December found a net balance of 52 per cent of banks had tightened credit conditions for loans to businesses over the previous three months.

More than a third expected to tighten further over the coming quarter, by widening lending spreads, hiking fees, toughening collateral requirements, cutting credit lines or tightening loan covenants.

Almost a quarter on balance reported rising defaults by mid-size clients. Looking forward, 13 per cent are braced for further defaults.

FDs should not be fooled by LIBOR’s fall. Companies that negotiated loans with low rates and weak covenants will find themselves landed with much higher bills – assuming their bank will lend to them at all.

FDs must budget for a lean year and not rely on LIBOR coming to the rescue. The global economy, and the UK in particular, will slow noticeably in 2008. Consumer demand will weaken as the housing market slows while rising inflation will raise input bills and fuel demands for pay rises.

Nine out of 10 lenders told the CBI they expected credit conditions to worsen. At times like this it pays to listen to Scrooge.