Eight Major Banks Raise Prime Lending Rate to 6.25% : Interest: Most analysts do not expect the quarter-point increase to act as a drag on California’s economic recovery.

Eight big banks nationwide Wednesday raised their prime lending rates to 6.25% from 6%, the first general hike in the benchmark lending rate in five years and another clear sign that the long decline in consumer and business borrowing costs is over.

Norwest Corp., a bank holding company in Minneapolis, triggered the increase in response to recent steps by the nation’s central bank, the Federal Reserve, to lift market interest rates. The Fed has raised short-term rates twice in recent weeks to prevent the growing U.S. economy from overheating and touching off excessive inflation.

Norwest was followed by Los Angeles-based First Interstate Bank of California, industry leader Citibank in New York, Banc One in Ohio and First National Bank of Chicago, among others. Although other major banks did not immediately follow suit, some analysts predicted they would shortly.

Regardless of whether other California banks match the increase, the rate hikes by the others will create a ripple effect quickly felt in the state.

Banking companies such as Norwest and Citibank are major interstate providers of home equity lines of credit, adjustable-rate credit cards and other short-term consumer installment loans that are directly tied to the prime rate.

“Traditionally people thought of the prime rate as the rate for your best corporate borrowers, but those days are long gone,” said David S. Berry, a banking analyst with the securities firm Keefe, Bruyette & Woods in New York. “The prime today is really a reference rate for consumer loans.”

A key question now is whether the upswing in consumers’ borrowing costs will delay the long-awaited recovery of California’s feeble economy by crimping the amount of cash people have to spend on furnishings, cars, apparel and entertainment.

Most economists don’t think so.

“I don’t think a quarter-of-a-point (increase) is going to cause any change in the timing of the recovery in California,” said Tom Lieser, an economist with the UCLA Business Forecasting Project. The group expects the recovery to begin taking hold in the latter half of this year.

John Hekman, economist at the research firm Economic Analysis Corp. in Century City, said “a much bigger factor” in California’s economy is that banks and other lenders remain skittish about lending to home builders and construction companies, regardless of current rates.

“There are lots of potential borrowers that would have been happy to pay higher rates if they could have gotten the loan,” Hekman said.

The Clinton Administration and Wall Street, meanwhile, took the prime rate increases in stride and focused on the improving U.S. economy. The Dow Jones average of industrial stocks rose 6.91 to 3,869.46.

White House spokesman Gene Sperling termed the banks’ action “a predictable and unalarming consequence” of the Federal Reserve’s increase in market rates, “which is entirely consistent with our forecast of solid growth and low inflation.”

Analysts noted that despite the higher prime rate, short-term lending costs in general are still relatively low. Indeed, the last time banks nationwide raised their prime rates in February, 1989, they were lifted to 11.5% from 11%.

They also noted that many fixed-rate and adjustable-rate home mortgages, auto loans and many business loans are tied to other interest rates and so would not be directly impacted by the prime rate change.

The rates on many home loans, for instance, react to changes in rates on 30-year Treasury bonds, which are particularly sensitive to the inflation fears that the Fed is now trying to calm.

Those Treasury rates, too, have risen sharply in recent months. “But if the Fed is successful” in calming inflation fears, “then long-term rates ought to come down,” Berry said. “So you might be in a world where rates on credit cards might go up, but rates on a 30-year mortgage might go down.”

The prime rate is typically a “lagging” rate, meaning the banks change it in response to interest rates in the financial markets. The banks’ action came one day after the Federal Reserve raised the federal funds rate--the rate charged on overnight loans between banks--for the second time since early February. The rate now stands at 3.5%, up from 3%.

Some economists worry that if the national economy keeps gaining strength, the Fed will keep raising rates, prompting the banks to keep raising their customers’ borrowing costs.

But others said competition in the banking industry is so fierce that the banks will think twice before charging more. Economists noted that after the Fed first pushed the federal funds rates to 3.25% on Feb. 4, the banks kept their prime rates at 6%.

The prime rate had moved steadily lower since early 1989 to the 6% level. Last October, Morgan Guaranty Trust in New York and Harris Trust & Savings in Chicago dropped their prime rates to a 21-year low of 5.5%. But the rest of the industry did not match that move, and the two banks raised their rates back to 6% earlier this month.