Banks Boost Prime to 9%, First Hike Since September : Dow Drops Sharply, Off 37.80
At least seven of the nation’s biggest banks boosted their prime lending rate half a percentage point to 9% today, the first increase since just before the stock market crash in October.
The impact was felt on Wall Street, where the Dow Jones average of 30 industrial stocks dropped 37.80 points to 1,965.85, extending a global selling wave triggered by a suggestion from British Finance Minister Nigel Lawson that central banks may coordinate a rise in interest rates.
New York Stock Exchange volume was about 176.72 million shares today compared to 131.2 million shares on Tuesday.
Chase Manhattan Bank was the first to announce the increase in the prime rate and was quickly followed by Citibank, Chemical Bank, Manufacturers Hanover, Continental Illinois Bank, Mellon Bank and Marine Midland Bank.
Other big banks also were expected to increase the key rate, which is watched closely because bankers use it as a base rate on loans to many businesses and for consumer loans, including home-equity loans.
The last time banks raised the prime rate was in September, when it went from 8.75% to 9.25%. The rate dropped back to 9% two days after the Black Monday stock market collapse. It fell to 8.75% on Nov. 5 and to 8.5% on Feb. 2.
Increase Predicted
Many economists had predicted an increase in the prime rate, which often lags behind rising interest rates elsewhere, because the cost of borrowing for banks themselves has been rising in recent weeks.
The higher borrowing costs reflect a fear of higher inflation, which has been fed by evidence that the economy is growing faster--especially figures reported by the government last week that showed unemployment had hit a 14-year low.
These inflation worries have led the Federal Reserve Board, the nation’s central bank, to nudge short-term interest rates higher. For example, the federal funds rate, the overnight interest on loans among banks, has risen above 7%, compared to around 6.6% less than two months ago.
On Wall Street, declining shares outnumbered advances by 8 to 1 on the New York Stock Exchange. Share prices also slumped on the American Stock Exchange and in over-the-counter trading.
The sell-off, which earlier battered share prices in London and Tokyo, was triggered by Lawson’s remarks, in an interview in the European edition of the Wall Street Journal, that a coordinated rise in interest rates by the major governments “is certainly possible” if U.S. interest rates are raised to cool American inflation.
Nikkei Index Tumbles
Lawson’s remarks sent Tokyo’s 225-share Nikkei index tumbling 251.20 points to close at 27,161.05.
London’s Financial Times-Stock Exchange index fell 35.8 points to 1,756.8--its lowest level since early April.
The financial gloom spread to Wall Street, where it was fueled by the news that major banks were raising the prime interest rate.
“It clearly hit a raw nerve, . . . this market was clearly vulnerable,” said Monte Gordon, vice president and director of research for Dreyfus Corp.
Market analysts point out that hauntingly similar jitters about rising interest rates were a big factor behind the Oct. 19 crash, and those memories are still fresh in the minds of nervous investors.
“The major problem with the stock market has been the rise in rates,” said Larry Wachtel, an analyst for Prudential-Bache Securities Inc.
The British Treasury expressed surprise at the way Lawson’s comments were interpreted, but that did little to soothe nerves, European dealers said. The British Treasury said Lawson was referring to a hypothetical position, not making a prediction.
