Biggest Banks Increase Prime Rate to 10.5%

The nation’s biggest banks raised their prime lending rates half a percentage point to 10.5% today, the fourth increase this year.

The increase pushes the base lending rate to its highest level since May, 1985, when it was lowered half a percentage point to 10%.

Chase Manhattan was the first institution to announce the hike, with several other major banks joining the move, including Citibank, Chemical Bank, Manufacturers Hanover Trust Co., Bankers Trust and San Francisco-based BankAmerica.

Reaction in the financial markets was restrained. Bond prices were mixed. The dollar initially rose in foreign exchange trading but quickly retreated.

Analysts had been expecting a prime hike due to the steady increase of short-term interest rates in the credit markets in recent weeks.

William V. Sullivan, economist for the investment firm Dean Witter Reynolds Inc., said there also was “building perception in the marketplace” that the Federal Reserve might push rates even further by raising its discount rate, or the interest charged to member banks for loans, to support the dollar.

Concerns about the growing federal budget and trade deficits have pushed the dollar sharply lower against most major currencies in recent weeks.