New York's largest bank, Citibank, which has faced severe administration criticism for raising its prime lending rate while loan demand is weak, yesterday held the rate at 6.75 per cent by revising the formula it uses to peg the prime rate.
In another development, the White House agency that monitors inflation, the Council on Wage and Price Stability, said yesterday it willbegin to watch interest rates charged by banks on a regular basis.
House Banking Committee chairman Henry S. Reuss (D-Wis.) had asked the council to do so last week, charging that the Federal Reserve Board was not really interested in monitoring them.
The revised Citibank formula narrows the spread between Citibank's prime rate and the going interest rate on 90-day commercial paper - short-term, unsecured notes issued by large corporations who need cash.
Reuss called Citibank's move a wise one and said it was "an encouraging development for the economy."Citibank pioneered the formula approach to setting the prime lending rate several years ago, in part to ward off pressure from the government and elsewhere that bankers were causing inflation by boosting interest rates. The prime rate is the interest banks charge their best corporate customers for a short-term loan.
With the prime rate tied to other interest rates determined by supply and demand for junds in the open market, banks could say that the prime rate was rising only in response to rising interest rates else where.
In May, short-term interest rates climbed markedly as the nation's central bank, worried about a renewal of inflation, tried to choke off a sudden spurt in the growth of the money supply.
in response to those rising rates, the prime rate charged by most banks rose as well, from 6.25 per cent to 6.75 per cent in two steps during May.
Although interest rates were rising because of a tightening in the Federal Reserve's monetary policy, loan demand was slack.
late last month Bert Lance, director of the Office of Management and Budget, criticized banks for raising their prime rates at a time when they were "awash" with cash to lend Lance also took a swipe at Federal Reserve chairman Arthur Burns for consciously pursuing a course which boosted interest rates.
Presidential press secretary Jody Powell told reporters that President Carter agreed with Lance.
Short-term interest rates have now levelled off as the Fed appears to have got the money supply growth back under control. But because the Citibank formula is based on a three-week moving average, its old formula would call for another prome rate increase.
Yesterday Citibank said it will now set its prime lending rate 1.25 percentage points above the three-week average of commercial rates, instead of the 1.5 points prescribed in its old formula.
Leon Gould, an economist with Commercial Credit Corp., a major issuer of commercial paper, said the Citibank move resulted from pressure from the administration as well as declining loan demand.
Robert Crandall, acting director of the Council on Wage and Price Stability, said there is "nothing particularly ominous" about the council's decision to monitor interest rates. He said in an interview that he had not talked to anyone in Lance's office or in the office of Treasury Secretary W. Michael Blumenthal about the move.
He said that Reuss's request was a reasonable one because interest rates are important to the economy.