Major Banks Lower Prime Rate to 10%, First Cut Since July
Several big banks lowered their prime lending rate a half percentage point today to 10%, the first reduction in nearly half a year, signaling cheaper loans for a broad range of consumers and businesses.
The move reflected the declining cost of money that banks have enjoyed in recent weeks, the result of a more liberal credit policy by the Federal Reserve, the nation’s central bank.
Citibank and First National Bank of Chicago were the first to cut the key rate. They were followed by Morgan Guaranty Trust Co., Bankers Trust Co., Continental Bank Corp., Mellon Bank, Manufacturers Hanover Trust Co. and Security Pacific National Bank.
The Fed has been moving to ease interest rates recently in order to forestall a dramatic economic downturn. Lower rates encourage businesses and consumers to borrow money.
First National Bank chief economist James Annable said more declines in the prime rate are probable in the months ahead.
“We’re not sliding into a recession . . . but it looks like a significant pause in the economy,” Annable said.
The prime rate is a benchmark that many banks use to calculate a range of other popularly known loan rates, including variable rate home equity loans.
“To Joe and Joan Average Consumer who have some of their loans tied to short-term rates this is good news,” said F. Ward McCarthy, an economist at Stone & McCarthy Research Associates Inc. “Many people have home equity loans or car loans tied to the prime . . . and monthly payments should go down by next month.”
The move today, effective immediately, marks the first time the rate has been changed since July 31, when banks lowered the prime to 10.5% from 11%.
Banks have cut their prime rates three times since last February, when the rate was hiked to 11.5%. They launched half-point declines in June and July.
One bellwether bank, Southwest Bank of St. Louis, assumed the Fed had eased enough for a cut in its prime rate to 10% in early November. But it moved the rate back to 10.5% when others did not follow.
Most economists predicted other banks would cut their prime rates by Tuesday, saying today’s move was long overdue. There was little reaction in the stock or bond markets, indicating that such a drop had been anticipated.
“It comes as no surprise. I think it was in keeping with current money market rates,” said William V. Sullivan, an economist with Dean Witter Reynolds Inc.
Sullivan said banks had the incentive to trim their prime just after Christmas when the Fed moved to lower the federal funds rate, the interest on overnight loans between banks, to the 8.25% level. He said banks put off any cut in the prime because seasonal demands for higher cash reserves had pushed the fed fund rate above 9%.
David H. Resler, chief economist for Nomura Securities Inc., predicted that most banks will have lowered their prime by Tuesday, after executives have had a chance to meet on the subject.
However, McCarthy said he wouldn’t be surprised if some banks continued to put off any action or lowered their prime only a quarter of a percentage point.
McCarthy said the so-called yield spread, which is the difference between banks’ borrowing costs and the rate at which they lend their money, “is not outlandish” based on current economic conditions.
