Several Major Banks Lower Prime to 8.75%

Several of the nation’s largest banks today slashed their prime lending rates a quarter of a percentage point to 8.75% amid mounting pressure for lower rates in the aftermath of last month’s stock market collapse.

Citibank, Chase Manhattan Bank, Bankers Trust Co., Morgan Guaranty Trust Co., Continental Illinois National Bank & Trust Co., Mellon Bank and Manufacturers Hanover Trust Co. announced the cuts shortly after the stock market opened.

U.S. stock prices, which started out lower today, quickly rallied following the announcement. Prices in London also rebounded smartly after a rough start.

The prime rate was cut as recently as Oct. 22, when it dropped for the first time this year to 9% from 9.25%. The latest reduction also follows interest rate cuts in Britain and West Germany.

Before last month, the prime had been raised five times since August, 1986, when it stood at 7.5%. Three banks had boosted the rate as high as 9.75% in October but promptly reduced it to 9.25% in the wake of the stock market collapse on Oct. 19.

Analysts said today’s reduction came as no surprise, given the fact that the Federal Reserve has eased its credit policies and rates in the credit markets have fallen sharply in response.

“I think there’s a real effort on the part of the Fed and the banking system to provide a lot of liquidity in an effort to keep short rates down and safeguard against a slowing in the economy,” said Nancy Vanden Houten, a money market economist for Merrill Lynch Capital Markets Inc.

“(Banks’) cost of funds has come down quite a bit so they decided to pass that along to their customers.”

A cut in interest rates often stimulates economic growth by making corporate and individual borrowing less expensive.

Overseas, West Germany and Britain also have pushed down their interest rates in moves that could help prevent the cut in U.S. interest rates from leading to further weakness in the dollar. The dollar has slid steeply in recent weeks.

On Wednesday, Britain’s four major banks slashed their key interest rates a half percentage point to 9% after the Bank of England signaled its desire to lower rates.

Today, West Germany’s central bank announced it would cut two key interest rates, and the central bank of Switzerland lowered its main lending rates by a half percentage point.

However, growing sentiment that the dollar remains fundamentally weak overshadowed the interest rate cuts as the U.S. currency failed to rebound in foreign exchange trading.