Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: TUESDAY, October 19, 1993 TAG: 9310190040
SECTION: BUSINESS PAGE: B8 EDITION: METRO
SOURCE: Associated Press
DATELINE: NEW YORK LENGTH: Medium
Other major U.S. banks didn't immediately follow Morgan Guaranty Trust Co.'s lead, but analysts expected they would. However, many of them doubted the rate cut would nudge debt-weary consumers and businesses to borrow money and in turn spur the economy.
The prime rate is used to calculate the interest on loans to small- and medium-sized businesses, generally a bank's most credit-worthy customers. A change in the prime, however, also affects some consumer loans, especially home-equity loans and credit cards rates.
Virginia bankers said they were monitoring the situation, but none acted Monday to cut their prime rates. On Sept. 16, Richmond-based Central Fidelity Bank cut its prime to 5.75 percent.
"People have been interested in paying down debt" rather than increasing it, said Raphael Soifer, a banking analyst at Brown Brothers, Harriman & Co.
The rate cut could actually hurt some consumers, if it prompts banks to lower the interest paid on deposits. Bob Heady, publisher of the Bank Rate Monitor newsletter, said he expected rates on short-term deposits to drop by 0.15 to 0.20 of a percentage points in coming weeks.
While other interest rates have fallen dramatically, banks had been slow to drop the prime. They reasoned that because of the slow economy, they wouldn't be able to make enough new loans to compensate for their decreased profit on each loan.
In addition, banks worried until recently that inflation could pick up and prompt the Federal Reserve to raise short-term interest rates.
Morgan Guaranty said in a statement Monday that it acted after considering loan demand, the banks' cheap cost of funds and the outlook for continued low inflation.
Harris Trust and Savings Bank in Chicago, a medium-sized regional institution, and the Bank of Montreal's U.S. office copied Morgan's step, but no other big banks took immediate action.
"What it tells you is something extremely important . . . and that is business loans and loan demand remain extremely soft," said Hugh Johnson, senior vice president at First Albany Corp., an investment firm in Albany, N.Y.
The last time the prime was lower than 5.5 percent was in June-October 1972, when it was 5.25 percent.
Staff writer Mag Poff contributed to this story.
by CNB