THE VIRGINIAN-PILOT
Copyright (c) 1995, Landmark Communications, Inc.
DATE: Thursday, February 2, 1995 TAG: 9502020391
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SOURCE: BY TOM SHEAN AND MYLENE MANGALINDAN , STAFF WRITERS
LENGTH: Medium: 86 lines
The Federal Reserve's half-point hike in short-term rates Thursday will further dampen the appetite for credit in Hampton Roads and throughout the state, bankers and economists predicted.
But the Fed's action shouldn't strangle economic growth in the region, they added.
``The economy is starting to show signs that previous rate hikes have taken effect,'' said Christine Chmura, an economist with Richmond-based Crestar Bank. ``Car sales have been slowing, and Christmas sales were not nearly as great as retailers had expected.''
However, ``there are no signs of any great imbalances that could cause the economy to halt,'' Chmura said.
One sector in Hampton Roads that could feel the pinch of higher rates is home building. The real estate industry as a whole is interest-rate sensitive.
``As the cost of money goes up, the cost of the product goes up and the qualifications of the buyers go down,'' said Edward P. Brogan, president of Brogan Enterprises Inc., a custom-home builder and remodeler in Virginia Beach.
Crestar and a handful of other Virginia banks responded to the Fed's action by boosting their prime lending rates to 9 percent from 8 1/2 percent. That compares with a prime rate of 6 percent one year ago.
The latest rise in the prime took effect immediately at NationsBank, Crestar Bank, First Union National Bank and First Virginia Bank.
Central Fidelity National Bank and Signet Bank said increases in their prime rates will take effect today.
The prime is the base rate that banks charge for most commercial loans and some consumer loans, including home-equity lines of credit and balances on variable-rate credit cards.
However, some Virginia bankers questioned whether the Fed's latest rate hike was necessary, given the abundant evidence that inflation has been modest.
The latest rate increase ``was somewhat of an overkill,'' and short-term rates probably will drop later this year as the pace of business activity slows, said John G. Sebrell, president of Old Point National Bank in Hampton.
At Central Fidelity Banks Inc. in Richmond, chief financial officer Charles Tysinger said that he would not rule out at least one more rate hike later in the year.
``We think there may be another increase by mid-summer,'' he said, ``but we hope they'd wait a little longer so they can get a reading of the economy.''
The declining yields on long-term Treasury bonds in recent weeks suggest that the nation's financial markets have increased confidence in Federal Reserve effort to curb inflation.
That may be good news for prospective home buyers in search of long-term, fixed-rate mortgages, whose rates are not directly affected by changes in short-term rates.
Mortgage bankers in Hampton Roads said they did not expect the Fed's action Wednesday to have any measurable impact on rates for long-term home loans.
The volume of residential lending in Hampton Roads has slowed ``but I'm not sure it's purely a function of interest rates,'' said Vicki Stephenson of NationsBanc Mortgage Corp. and president of the Tidewater Mortgage Bankers Association. ``I think economic conditions in Tidewater have contributed more to the slowdown than interest rates,'' she said.
With the steady increase in short-term rates, CENIT Bank has witnessed a greater number of home buyers interested in long-term, fixed-rate loans and fewer who are interested in adjustable-rate loans, said John O. Guthrie, the senior vice president and chief financial officer at the Norfolk thrift.
After the first upward adjustment on an adjustable-rate mortgage takes effect, the rate is close to that of a long-term, fixed-rate mortgage, he said.
Car buyers can expect to pay higher rates on car loans, although the increases may be slower to take effect than rates on home-equity lines of credit and other loans pegged to the prime rate.
``Auto loans have been extremely competitive and have not kept pace with the prime,'' said Richard F. Bowman, treasurer and chief financial officer of First Virginia Banks Inc., parent of First Virginia Bank of Tidewater. In Virginia, he said, the rates for new-car loans range from 7.99 percent to 8.49 percent.
In the wake of past increases in short-term rates, many Virginia banks were slow to raise the rates paid for consumer deposits - their raw material for many loans.
That's changing, said Bowman. ``Banks have gotten particularly competitive in certificate of deposit rates in the past month or two,'' he said. by CNB