Chase Manhattan Cuts Prime to 10.5% : North Hollywood Bank Among Few Following Suit

Chase Manhattan Bank, one of the nation’s largest money center banks, today cut its prime rate to 10.5% from 11%, effective immediately. No other major bank immediately followed the move.

The unwillingness on the part of the other major banks to immediately follow the Chase move caught some analysts by surprise, but most believed that the cut was justified and would spread throughout the industry.

Three smaller banks today announced similar cuts in their prime rates--the base rate used to calculate interest on a variety of loans to small businesses and consumers, including home equity loans.

The Union Bank & Trust of Alabama, First Federal Savings Bank of Boston and the American Pacific State Bank in North Hollywood, Calif., cut their prime rates to 10.5%, also effective immediately.

Last Friday, the Southwest Bank of St. Louis, which often has been the first bank to cut the base rate, lowered its prime to 10.5%.

Last Adjustment June 5

The last adjustment in the key rate was June 5, when the nation’s major banks lowered the prime rate to 11% from 11.5%.

“A prime rate cut to 10.5% is justified,” said William V. Sullivan Jr., senior vice president at Dean Witter Reynolds Inc. “The slack demand for commercial and industrial loans would justify a cut right now.”

Sullivan said it appeared the other major banks had delayed a decision because of “some uncertainty over where the Federal funds target might be.”

Sullivan was referring to the Federal funds rate--the rate banks charge other banks for overnight loans--which is the market interest rate over which the Federal Reserve exercises direct control.

In early June, after more than a year of a restrictive monetary policy to curb inflationary pressures, the Fed signaled it would allow short-term rates to ease. That signal coincided with the prime rate’s last reduction.

“We are going through a period of change in Fed policy,” Sullivan said. “Rates have peaked and are moving down.”