The row between Labour and the Conservatives over the interest rate-fixing scandal escalated yesterday as it emerged that a cabinet ally of George Osborne argued that a lowering of the Libor rate during the 2008 banking crisis was "where we need to get to".
Philip Hammond, the Defence Secretary, who is close to the Chancellor, told Parliament in November 2008 that the "desired effect" of the Labour government's policies on encouraging lending would have been a 1.5 per cent fall in the London Inter-Bank Offered Rate.
Labour said yesterday that the intervention by Mr Hammond, then shadow chief secretary to the Treasury, showed that there was no manipulation of Libor by Labour ministers or officials in Whitehall at the time, but that it was a legitimate policy concern of both government and the Tory opposition – something quite different to the illegal fixing undertaken by Barclays traders.
In a further blow to the Chancellor's main line of attack against Labour, a note written for the Treasury on bank borrowing costs by UBS bankers, entitled "Reducing Libor, improving lending conditions", was published showing proposals that there should be legitimate changes to government policy in order to reduce Libor.
On Thursday, in the Commons, Mr Osborne suggested in angry clashes with his opposite number, Ed Balls, that Gordon Brown's City adviser, Baroness Vadera, had questions to answer as she had a role in the UBS note.
However, the full publication of the memo makes clear that Lady Vadera was acting legitimately because it details an above-board strategy to make lending conditions more favourable to businesses. Labour sources said Mr Osborne needed to make a full public apology to Mr Balls and Lady Vadera, preferably in the Commons. The Chancellor's aides have so far withdrawn on his behalf only an accusation made in The Spectator that Mr Balls and other figures close to Mr Brown were "clearly involved" in trying to manipulate interest rates.
Paul Tucker, the Bank of England's deputy governor, will appear before the Treasury Select Committee tomorrow to explain his version of a conversation he had on October 29 2008 with Bob Diamond, then a senior executive at Barclays. Mr Diamond claims that Mr Tucker was told "senior Whitehall figures" were putting pressure on Barclays to lower their submissions to Libor.
This week Andrew Tyrie, the Conservative chairman of the Treasury Select Committee, is expected to publish details of other members of a parliamentary inquiry into the Libor scandal. It is expected that the Labour peer Lord McFall, a former member of the select committee, will join the inquiry and may even act as a joint chairman, to assuage concerns that the investigation will be party political.