Rate cut boost for homeowners

Government plans to use the economy to win a second term in office were boosted yesterday when the Bank of England prompted the cheapest mortgage rates since the 1960s with the third cut in interest rates this year.

Banks and building societies responded immediately to the decision by the Bank's monetary policy committee to reduce lending rates from 5.5% to 5.25% when they decreased the monthly cost of a £100,000 home loan by around £20. The nine-strong committee hinted that further cuts may follow.

The move - part of a global trend towards cheaper borrowing which included a surprise reduction yesterday by the European Central Bank - came as Tony Blair announced his intention to make the economy the focal point of Labour's re-election strategy, with an emphasis on low inflation, low interest rates and falling unemployment.

Most major mortgage lenders passed on the full 0.25% cut in rates to their customers. Abbey National said its flexible mortgage rate, which applies to new customers, will drop to 6%. The Halifax said its rate for new customers would be cut to 6.25%.

Abbey National said borrowers with an interest-only loan of £60,000 would save £12.50 per month and £20.84 with a £100,000 loan. The bank said the reduction "will stimulate an already buoyant mortgage market where we are experiencing record levels of lending".

In a statement reflecting pressure from some committee members for a deeper cut in rates, the Bank said that inflation was currently somewhat below the government's 2.5% target and "is expected to remain so for for a while".

The Bank added that domestic demand was firm but the global outlook had darkened, growth in the first quarter had been slower than expected and business confidence had weakened.

Official figures released yesterday showed that the sharp downturn in the US and the signs of weakness in Germany that prompted yesterday's cut from 4.75% to 4.5% from the ECB are affecting UK manufacturing. Output from Britain's manufacturing sector contracted by 0.7% in the first quarter, the office for national statistics said.

Financial markets had been anticipating the rate cut following signs that the slowdown in manufacturing has started to spread to the service sector. However, the decision was still welcomed by both employers' organisations and unions as a necessary step to boost growth prospects and protect jobs.

Digby Jones, director general of the Confederation of British Industry, also applauded the move.

He said: "Companies will be relieved the Bank has seized the opportunity to soften the impact of the global slowdown.

"This was a timely and proportionate move that will steady business nerves without taking risks with inflation. We need to keep rates moving in a downward direction as quickly as prudently possible."

David Sears, deputy director general at the British Chambers of Commerce, said: "With business already planning to reduce output, this will bring a boost to confidence and add further insulation against the US slowdown and the wider impact of foot-and-mouth."

However, Mr Sears warned that the Bank should not hesitate to cut rates again next month even though the decision would have to be taken a day before the general election.

John Monks, the TUC general secretary, said the cut was "very welcome", adding: "It is a sensible insurance policy which will help protect the UK from any economic fallout from across the Atlantic.

"It also boosts industrial confidence in a sector which has had more than its fair share of bad news recently."