IS THE credit crunch over? Will we soon be able to get back to normal and pay cheap rates to borrow money? The Bank of England's monetary policy committee kept the base rate on hold at 5% last week, but it certainly hopes we are over the worst. In the words of the deputy governor Sir John Gieve, pictured right: "While there remain downside risks, the most likely path is that confidence and risk appetite will return gradually in the coming months."

Building society bosses are also in buoyant mood: 70% are optimistic about the year ahead despite the testing market conditions, according to research published last week by the Building Societies Association (BSA).

So are they right? Philip Shaw, UK group economist at Investec Bank, says: "The Bank of England has taken an optimistic line. And it's true the financial situation has improved. But it is wrong to think that the credit squeeze is over."

The squeeze hit the headlines last September when cashflow problems forced Northern Rock to ask the Bank of England for an emergency loan. There was widespread panic and customers queued for hours to withdraw their savings. Northern Rock blamed its money problems on the global credit crunch, caused by the sub-prime crisis in America. Basically, lenders had offered mortgages to people who could not afford to pay off their debts - and it all went horribly wrong.

The money markets reacted quickly. Stock markets fell, bank shares nose- dived and loan rates shot through the roof.

If you wanted to take out a mortgage this time last year, you could have picked a two-year fix from Newcastle Building Society at 5.07%. The best deal now is 5.49% with Woolwich, but you will need a deposit of at least 40% of the property value. If you don't have a big deposit, you could be paying closer to 6%.

Tracker loans are also more expensive than a year ago because lenders have increased their margins. Alliance & Leicester was offering a tracker at 0.31 percentage points below the base rate last year. Now there are no trackers below the base rate - and the best deal is again from Alliance & Leicester, at 0.89 points above base.

It's not just that rates have climbed. Lenders have also withdrawn many of their mortgage ranges. It is now, for example, impossible to get a 100% mortgage. Some lenders are also pulling out of 95% deals. David Hollingworth of L&C Mortgages, a broker, says: "Mortgage ranges are definitely shrinking. Only last week, Woolwich withdrew its remaining 95% loans, so borrowers now need a deposit of at least 10%." However, there are signs that the mortgage market is calming down. Hollingworth says: "We have recently seen some lenders re-price their loans twice in one week. Rates are not now changing quite so rapidly, and the market seems to have stabilised."

Some lenders have even cut rates for certain borrowers, usually those who can put down a big deposit.

The Bank of England's recent £50 billion attempt to inject some liquidity into the markets might have loosened up lending. The three-month Libor rate - the rate at which banks lend money to each other - has dropped to about 5.8%, edging down from above 6% last month. Simon Ward, an economist at New Star, says: "With loan losses rising, and banks under pressure to conserve capital reserves, credit conditions will remain considerably tighter than in recent years.

"However, the risk of a full-scale lending crunch has receded, and stronger banks are likely to take advantage of a recent widening of interest margins to boost their market share."

But the Libor rate is still high - and well above the base rate. And as long as it remains high, banks will struggle to raise funds and consumers will still feel the credit squeeze. Hollingworth says: "The mortgage market now is very different to a year ago. It is harder to get a loan and it is more expensive. Economists might declare that the worst is over, but it certainly doesn't feel that way if you need to borrow money."