Banks expect to cut back further on lending as a result of the credit crisis, the Bank of England said yesterday, while Federal Reserve policymakers thought big interest rate cuts may be needed to buoy the US economy.

The latest blow to the financial sector landed at the door of State Street Corp, one of the world's largest asset managers, which said it would take a $279 million charge related to subprime mortgages and other debt.

A BoE survey showed British banks scaled back lending to households in the last three months of 2007 as money market strains persisted and expect to cut back further in 2008 - at a time when the economy is already expected to slow.

Corporate credit availability was also reduced sharply and conditions look set to tighten further in the next three months while mortgage defaults were likely to rise, the survey showed.

Analysts said the gloomy prognosis raised the chances of a UK rate cut next week to follow December's reduction to 5.5 per cent. "The significant tightening of credit conditions... and the expected continuation of these trends in the first quarter of this year, increases pressure on the Bank of England to trim interest rates again sooner rather than later," said Howard Archer, economist at Global Insight.

Markets are predicting the US Federal Reserve will follow suit when it next meets on rates at the end of January. It has already cut its key rate three times to 4.25 per cent since the credit crisis first broke.