THE ECONOMY : B of A Decides to Cut Its Prime Rate to 10.5%
Bank of America announced Friday that it will trim its prime lending rate half a percentage point to 10.5% because of its own declining borrowing costs and further signs of a weakening economy.
The move, effective Monday, follows that of Chase Manhattan Bank, which on July 10 dropped its prime to the same level, the second such decline in as many months and the level at which the prime stood at the start of the year.
Analysts expect most other major banks to follow the lead of the nation’s second-largest bank.
Chase took the first step when it followed bellwether Southwest Bank of St. Louis and cut its prime rate to 10.5% on July 10. A few of smaller banks--most notably NCNB Corp., based in Charlotte, N.C.--joined Chase, but major money center banks had held at 11% until B of A’s move.
When other major banks did not immediately follow Chase, analysts suggested that the institutions were waiting to see a more definitive step by the Federal Reserve to ease credit.
Pressure has been increasing on the banks to lower their rates because the Fed is indeed easing credit and mortgage interest rates fell last month to their lowest level in more than two years, prompting a rush of new loan applications.
The Fed signaled a looser credit policy early this week by not fighting the closely watched federal funds rate as it fell to 9.125%. By Friday, the rate was at 8.938%.
Bank of America’s chief economist, John Oliver Wilson, cited the falling federal funds rate and signs of a slowing economy as the main reasons for its move.
The prime rate, the rate used as a benchmark by banks for determining various other lending rates, is a key rate for consumers because many home equity loans and other consumer loans are pegged to it.
Wilson said the Federal Reserve has shown signs of loosening its grip on the nation’s money supply in reaction to a continued slowdown in economic growth and an easing of inflation.
Reflecting banks’ continued dropping costs of funds, the average yield on six-month certificates of deposit fell to a national average of 8.47% last week, compared to 8.52% the previous week and the 8.8% range in late June, according to Bank Rate Monitor.
In the bond market, another indicator of general interest rate trends, the yield on the 30-year Treasury bond finished at about 7.98% Friday, its first close below 8% since April 8, 1987.