Sept. 5 (Bloomberg) -- The shortage of funds in global money markets has worsened since the Federal Reserve and the European Central Bank tried to ease a squeeze on interbank lending, according to Barclays Capital.

Central banks worldwide added more than $350 billion to the financial system since Aug. 9 to avert a crisis of confidence fueled by concern that U.S. subprime-mortgage losses will curtail lending. The three-month dollar London interbank offered rate that banks charge each other to borrow rose today to 5.72 percent, the highest in seven years.

``This suggests that the money market liquidity crisis is getting worse, not better,'' said Tim Bond, the London-based head of global asset allocation at Barclays Plc's securities unit. Barclays, the U.K.'s third-biggest bank, tapped the Bank of England's emergency overnight funds twice last month at the central bank's penalty rate of 6.75 percent, 1 percentage point higher than its benchmark rate.

The Bank of England today offered to provide additional cash to reduce ``unusually high'' overnight interest rates and said it shouldn't be expected to take action to reduce three- month borrowing costs. The European Central Bank said money market volatility has increased and it may act tomorrow to ``contribute to orderly conditions.''

Overnight Lending

The rate at which banks lend pounds to each other overnight declined to 5.91 percent from 6.11 percent today after the Bank of England's announcement, according to figures compiled by the British Bankers Association. The three-month rate was unchanged at 6.8 percent, the most since December 1998. The bank's goal is to keep the overnight rate close to its benchmark lending rate, currently 5.75 percent.

``Lowering the overnight rate will not encourage banks to lend out more term money,'' Bond said in a phone interview today. ``Central banks are putting money in the wrong maturities, they should be supplying three-month money.''

Bond said lenders are being put off seeking emergency funds from central banks because of the associated bad publicity. Barclays's shares have fallen 13 percent in the past month.

``Banks won't be using the central banks' emergency funding windows because the stigma is so great,'' Bond said. ``It hurts your share price and gives rise to speculation about the banks' viability and impairs their ability to raise capital overall,'' Bond said.

To contact the reporter for this story: Patricia Kuo in Hong Kong at pkuo2@bloomberg.net.

Last Updated: September 5, 2007 11:50 EDT