2 Major Banks Trim Prime Loan Rates to 21-Year Low : Finance: Cuts to 5.5% affect blue chip customers. Some consumer lending is also tied to the benchmark.
Two major banks cut their prime lending rate Monday to 5.5%--the lowest level in 21 years--in a move that could bring relief to consumers and corporations with loans and credit card accounts tied to the key interest rate.
The action by Morgan Guaranty Trust of New York and Harris Trust & Savings of Chicago marked the first significant reduction in the prime--the benchmark rate for blue chip customers--from the 6% level where the rate has generally stood since July, 1992.
Many consumer loans, such as home-equity borrowing, are tied to the prime rate. In addition, an estimated 20% to 30% of all credit cards have interest rates that move in tandem with the prime.
Although most interest rates have been plummeting and long-term mortgage rates have fallen below 7%, the prime has been slow to come down. Banks have been criticized for propping up the rate to bolster their profits, which have soared as the costs banks pay for their own borrowed funds have declined.
“Maybe they’re kind of embarrassed about the high spread they’ve been enjoying all this time,” said Ed Yardeni, chief economist at C. J. Lawrence.
News of the cut sent many bank stocks plunging because investors believe the move could cut deeply into bank profits. Shares of First Interstate Bancorp, for example, tumbled more than $3 on the New York Stock Exchange Monday, even as the company reported sharply higher profits.
Combined with last week’s reports on stable consumer prices, the prime rate cuts were another sign that inflation appears to be well under control. At the same time, many economists worry that falling interest rates alone won’t spur the economy because consumer confidence remains low and indebtedness generally is too high to expect a rush in borrowing to take place.
Interest rates have been anchored for more than a year by the Federal Reserve’s 3% target for the federal funds rate--the interest rate that financial institutions charges each other for overnight loans.
No other banks rushed to match Morgan and Harris Trust, which lowered their prime rates from 6% and 5.75%, respectively. (The last time the prime was lower than 5.5% was in 1972, when it was 5.25%.)
Many institutions were said to be waiting to see who else follows before committing to the lower rate. Nevertheless, many observers Monday expected other banks to match Morgan Guaranty, a unit of financial giant J. P Morgan, an industry bellwether and the fourth-largest U.S. banking concern, with $129 billion in assets.
“Morgan is a (major) bank and where Morgan goes someone else will follow,” said Lyle Gramley, consulting economist at the Mortgage Bankers Assn. of America and a member of the Federal Reserve Board from 1980 to 1985.
Harris last month joined Southwest Bank of St. Louis and Central Fidelity Bank of Richmond, Va., in lowering their prime rates to 5.75%. Morgan was first to announce a 5.5% prime rate Monday, which Harris matched a short time later.
“It’s good and bad news,” noted William C. Dunkelberg, chief economist at the National Federation of Independent Business, a Philadelphia-based trade group. “About 40% to 50% of businesses have loans tied to prime so they will see an immediate drop in their interest expense.”
The bad news, he said, is that lower rates are “symptomatic of low demand, which is a symptom of a weak economy. Rates aren’t low enough. There is no productive demand for money.”
In addition, the cut means banks and money funds will pare the rates paid to depositors.
Depositors have already seen yields on their savings slide steadily in the last three years, said Robert K. Heady, publisher of Bank Rate Monitor, a North Palm Beach, Fla.-based newsletter that tracks bank interest rate trends.
Morgan Guaranty said it took the decision to lower its prime rate to spur anemic loan demand and to bring the prime rate more in line with the lower cost of funds. The bank also believes that inflation remains in check, spokesman Richard Mahoney said.
But some industry observers groused that Morgan, a bank known mainly for securities trading and loans to other financial institutions, has little to gain or lose because it has a relatively small portion of loans tied to the prime rate.
First Interstate was not the only major institution whose stock was battered Monday. In New York stock exchange trading, BankAmerica lost $1.50 to $43.125, and Citicorp slumped $1.75 to $35.625. First Chicago shares slid $2 to $45.875.
Times wire services contributed to this story.
