Major Banks Lower Prime Rate to 11% : 3 Calif. Institutions Join in Following Lead of Citibank

Major banks lowered their prime lending rates half a percentage point to 11% today, responding to the decline of interest rates on financial markets.

New York-based Citibank, the nation’s largest bank, was the first to announce that it had lowered its prime lending rate. Several other big banks, including Chase Manhattan Bank, Morgan Guaranty Trust Co., Chemical Bank, Bank of America, Security Pacific National Bank and the Bank of California quickly followed suit.

Today’s decline was the first drop in the major banks’ prime rate--used as a base for a variety of other interest rates, including those on consumer loans--since Feb. 2, 1988. On that day, the prime fell 0.25 percentage points to 8.5%, but then began a climb that ended today.

The latest decline places the prime rate back at the level it reached Feb. 10 of this year, when it rose to 11% from 10.5%. Two weeks later, on Feb. 24, it rose another 0.5 percentage points to 11.5%, and remained at that level until today.

‘Lost a Lot of Steam’

Economists said today’s decline came in response to market interest rate trends.

“The banks have finally acknowledged the drop in rates that has occurred in recent weeks,” said Ward McCarthy, a managing director of Stone & McCarthy Research Associates Inc., a money market research firm based in Princeton, N.J.

The Federal Reserve pushed interest rates higher early this year to keep the economy from overheating. But rates have fallen recently “primarily because the economy has clearly lost a lot of steam,” McCarthy said.

On Feb. 24, the interest rate on the Treasury’s 30-year bond was 9.18%, while today, the yield was quoted at 8.43%.

McCarthy said it is somewhat surprising that the banks decided to act although the Fed has not yet eased its stand on interest rates.

“I think it’s pretty much a foregone conclusion that the Fed will ease policy,” he said.

Some Doubt Fed Action

But some economists did not agree that the Fed will allow interest rates to plunge.

“They have not yet been convinced that the inflation dragon has been tamed,” said Donald Ratajczk, director of economic forecasting at Georgia State University in Atlanta.

The prime rate reflects a bank’s costs of borrowing money, including interest it pays on customer accounts, short-term certificates of deposit and bonds, and as such mirrors rather than forecasts rate trends.

William V. Sullivan Jr., senior vice president at Dean Witter Reynolds Inc., said that in addition to the easing in short-term rates, the catalyst for the prime cut came Friday with the release of the May unemployment report.

The government said that the overall jobless rate slipped to 5.2% from April’s 5.3%, but non-farm payrolls rose only 101,000, the lowest increase in months and far below market forecasts of more than 200,000.

“The report was a further indication of economic weakness,” Sullivan said.