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The number of households defaulting on their mortgage payments is expected to rise over the next three months, the Bank of England has warned.

Its gloomy assessment comes as it says the global credit crunch is likely to worsen into 2008, as banks become less willing to lend out funds.

The Bank’s comments came as it said homes and firms found it harder to borrow funds towards the end of 2007.

Its findings may raise hopes of a further cut in interest rates.

The Bank’s comments came in its latest quarterly Credit Conditions Survey, which covers the last three months of 2007.

It said banks were now less willing to lend because of the higher cost and reduced availability of credit.