Northern Rock, the Government-owned mortgage lender, today admitted it would cut a third of its staff and reduce mortgage assets by half, leaving current borrowers out in the cold when their deals expire.

The bank is expecting to cut just over 2,000 from its workforce by 2011, in an effort to help repay a £25 billion emergency loan Northern Rock was forced to borrow from the Bank of England last September to stop it going bust. The bank’s management hopes to pay back the loan in three or four years.

Northern Rock said today it is aiming to reduce its current loan book, which is worth £100 billion, to around £50 billion by selling off the mortgage assets to other lenders or by simply declining to offer new loans to existing customers.

A spokesman at Northern Rock said the bank will continue to offer prime mortgages to customers, but it will not give unsecured loans and those customers whose mortgages have come up for renewal are being encouraged to seek deals from alternative mortgage providers.

Ron Sandler, executive chairman at Northern Rock, denied that Government support gave the bank an unfair advantage over other rival mortgage providers.

He said: "We recognise that we're supported by the Government and we don't wish to abuse that support by competing unfairly. We'll ensure we strike a sensible balance."

He added: "Things that are being said aren't always accurate. Our headline rates are between 6 per cent and 6.25 per cent and that's well within the basic band".

Northern Rock said today it will work "sensitively" with its staff and Unite, the union, "to minimise the extent and impact of job losses".

However, Unite said it will oppose any compulsory redundancies and is seeking assurances that Northern Rock's workforce will be reduced through voluntary means only.

Northern Rock unveiled its restructuring plan today as new figures emerged showing that inflation during February rose to 2.5 per cent - the sharpest increase since May last year.

The increase casts further doubt on an imminent interest rate cut by the Bank of England which would help Northern Rock.

Consumer Price Index (CPI) inflation rose from 2.2 per cent in January to 2.5 per cent last month, driven largely by increasing utility bills from Britain's major energy suppliers which have increased prices for gas and electricity since the beginning of the year.

February is the fifth month in a row that inflation has been above the Bank of England's 2 per cent target.

The Bank of England's Monetary Policy Committee (MPC), which is responsible for setting the UK interest rate, is now facing a difficult balancing act of protecting consumers against a deteriorating economy and falling house prices while inflation continues to grow.

Last month, the MPC opted to leave interest rates unchanged at 5.25 per cent. In contrast, the US Federal Reserve has made a number of cuts to its interest rate, with the most recent at the weekend which reduced the cost of interbank borrowing by 0.25 per cent to 3.25 per cent.

The Bank of England's MPC will next meet on April 9 and 10 to decide whether to cut or hold the UK interest rate.

The US Fed is expected to make another reduction this afternoon, with some economists expecting as much as a 1 per cent reduction as America attempts to fight off a full-blown recession.

Yesterday, global stock markets oscillated wildly as investors digested the emergency rescue of Bear Stearns by JP Morgan Chase.

In London, after yesterday's steep losses, the FTSE 100 index of leading shares was trading up 82.6 points to 5,697 as the UK looked to the US for this afternoon's rate decision.

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