Banks Cut Prime to 1972 Level

Major banks were quick to cut their prime lending rates Tuesday to a 29-year low as the Federal Reserve again eased credit. The lower prime will directly reduce borrowing costs for many businesses and consumers.

Citigroup Inc., J.P. Morgan Chase & Co., Wells Fargo & Co., Bank One Corp. and other big banks cut their prime rates to 5%, from 5.5%, after the Fed trimmed its benchmark short-term rate to a 40-year low of 2%.

Many corporate and consumer loans are tied to the prime, which banks use as the interest cost on short-term loans to their highest-quality customers.

The lower prime means the cost of many adjustable-rate loans tied to that benchmark--including home equity credit lines and credit card rates--may decline in coming days, unless the loans have reached previously agreed-upon “floor” rates.

Short-term credit often is quoted at “prime-plus” rates. For example, a loan rate might be “prime plus two points.” In that case, the new rate on the loan would be 7%, unless the loan has a higher floor rate.

Analysts say consumers with adjustable-rate loans or credit lines should study the fine print in their loan agreements to determine if their rate will fall, and how soon.

The last time the average prime rate for U.S. banks was 5% was June 25, 1972, according to Fed data.

The latest drop in rates will cut interest costs for many indebted consumers, but it may not spur new borrowing, analysts say.

Fearful of losing their jobs, many Americans now seem ready to put away their credit cards and live more frugally. Americans have reined in their appetite to borrow in recent months: Since spring, growth in consumer debt outstanding has slowed sharply.

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Reuters and Bloomberg News were used in compiling this report.