STRUGGLING manufacturers and homeowners have been handed a lifeline with a surprise cut in interest rates.

The Bank of England has taken action to counter the economic slowdown by cutting interest rates by 0.25 per cent, to five per cent.

The surprise cut is the fourth this year and brings rates down to their lowest rate since August 1999.

Union leaders welcomed the move, saying it would alleviate pressure and save thousands of jobs.

The cut will also cheer homeowners, as the average mortgage of £60,000 will be just under £10 a month cheaper.

A rush of mortgage lenders cut their rates immediately after the decision including Northern Rock, Halifax, HSBC and Nationwide, while the Council of Mortgage Lenders said mortgages rates had now hit their lowest levels for more than 40 years.

The Northern Rock, based in Newcastle, cut its standard variable rate from 6.99 per cent to 6.75 per cent with immediate effect for new applicants, and from September 1 for existing borrowers.

However, in the City, economists said the move showed the Bank of England had a worse outlook on the global economy than had been appreciated.

In its statement, the bank said its decision was made to sustain domestic demand growth in the light of weaker than expected expectations of world economic activity, the persistent strength of sterling and weakening investment growth.

The bank said this was contrasted with robust retail spending, household borrowing and the housing market remaining robust.

It said that, on balance, the outlook, "although highly uncertain, was for aggregate demand and output growth to be weaker than previously projected".

The cut was welcomed in the City, where the FTSE 100 Index jumped 11 points within seconds of the announcements.

In the North-East, the cut was welcomed by the North-East Chamber of Commerce, which said it would boost both manufacturers and exporters.

Rachel Spence, head of policy, said: "It is clear we have a two-tier economy operating at present, with buoyant services and retail sectors, but struggling manufacturers and exporters.

"The committee has listened to the pleas of industry, which will give encouragement to our manufacturers.

"They have seen the bigger picture, and taken a decision which benefits the whole country."

The news was also welcomed as a breathing space for small businesses.

The Federation of Small Businesses financial affairs chairman, Tony Miller, said: "The decision sends the right signal at a time when small manufacturing companies are increasingly running into debt."

Mr Miller said he looked forward to the high street banks following the move quickly, by reducing their rates accordingly.

Roger Lyons, general secretary of the Manufacturing Science and Finance union, said: "We congratulate the bank on finally listening to the plight of manufacturing industry. This cut is welcome news that will alleviate the pressure and save thousands of jobs."

The Engineering Employers' Federation's chief economist, Stephen Radley, said: "This is the right response to ensure the global slowdown avoids damaging the UK economy any further."

Brendan Barber, deputy general secretary of the TUC, said the cut was very wise and showed that the bank was taking the threat to manufacturing seriously.

GMB general secretary John Edmonds said the cut gave manufacturers a breathing space, adding: "The committee must follow this up to provide genuine help for UK industry, otherwise this cut will prove to be too little too late."

John Cridland, deputy director general of the Confederation of British Industry, said: "Even though consumer spending remains robust, the cut was justified because of the impact on the global slowdown."

The decision came as the European Central Bank left its key interest rate unchanged, at 4.5 per cent, sticking to its hard line against inflation, and again resisting calls to cut interest rates, in the face of an unravelling European economy.