Drop in Prime Rate Gives Stocks a Boost : New York Bank Cuts Benchmark Charge to 10 1/2%

Manufacturers Hanover Trust Co. of New York, the nation’s fourth-largest bank, said Monday that it is cutting its prime lending rate to 10 1/2% from 10 3/4%, the lowest level at a major bank since early 1983, when the U.S. economy began pulling out of a deep recession.

Financial analysts predicted that other institutions would soon follow. But they differed over whether further reductions might be forthcoming in the prime, the benchmark by which banks set interest rates for their most credit-worthy corporate customers.

“We think the prime is going to bottom out at 10 1/2% for a few months before rising gently the rest of the year,” said Donald H. Straszheim, chief domestic economist for Philadelphia-based Wharton Econometrics.

“ ‘Gently’ is the key word here,” he added. “We think the risks of a major interest-rate rise are very, very low because of the economy’s extraordinarily good inflation performance.”

May Not Be Last Cut But H. Erich Heinemann, a money market analyst who heads a New York firm bearing his name, said: “My sense is that the downward movement in the whole interest-rate structure is not over yet. I would expect this rate reduction will spread and would be very surprised if this was the last downward move in this particular cycle.”

In announcing the decision to lower its prime, which is effective today, Manufacturers Hanover cited the sharp drop in the cost of obtaining funds from other banks and from the government.

The prime last stood at 10 1/2% in February, 1983, and it had not been lower for more than four years before that. By August, 1983, the prime had moved up to 11%. It reached a high of 13% in June, 1984, before beginning to inch down again in the final quarter of the year.

The prime rate at other major banks is currently 10 3/4%, the rate many of them adopted last month.

Although most consumer loans are not directly tied to the prime rate, reductions in the prime often foreshadow trends in consumer borrowing costs. However, Straszheim was not optimistic that consumers would see any benefit from the latest drop in the prime.

“But what we do know in the consumer sector is that mortgage rates have not finished their cyclical decline and there is perhaps another half-percentage-point decline coming there,” he said. “The reason is that mortgage rates now reflect movements in short-term interest rates much more than they did a few years ago.”

He said that the effective mortgage rate as calculated by Wharton fell to 12.71% in December from 12.88% the month before.