In a move that surprised the banking community here, Morgan Guaranty Trust Co. announced today that it will cut its prime lending rate by 1/4 per cent to 6.5 per cent, effective Tuesday.
Morgan's drop in the prime rate, which is charged to its best corporate customers, is significant because it comes at a time when rising interest rates have drawn increasing concern both within the Carter Administration and on Wall Street. Morgan is the nation's fifth largest bank.
The fear is that the recent increase in short-term rates - a one-half to three-quarter per cent rise a month - could throttle the country's economic expansion if it continues. The increase has been directly attributed to a tightening of monetary policy by the Federal Reserve Board.
"Political considerations were not a factor," a Morgan spokesman said in explaining the move. "We've used strictly marketplace factors in our analysis," he added.
One factor he cited was the continued slack demand for loans from corporate customers. "We just think that this is the right rate for us the way we see the marketplace both on the demand side and on the cost side."
Morgan might find itself "hanging out there awhile alone' 'at the 6.5 per cent level, according to one New York banker, who called the move "absolutely crazy."
Other analysts predicted that while a few banks might follow Morgan down - particularly the Eastern wholesale banks which have experienced the weakest loan demands - that it was likely a split rate situation would prevail with most banks maintaining 6 3/4 per cent.
"Morgan, in essence, is leading in here," commented Leonard J. Santow, senior adviser of J. Henry Schroder Banking Corp. "I suspect that other banks will not follow," he said.
Other New York bankers said Morgan took the step "for image. Maybe because they can afford it," and "obviously in response to soft loan demands."
Morgan raised its prime rate to 6 3/4 per cent from 6.5 per cent only two weeks ago. While short-term interest rates have leveled off in the last ten days, they have not really dropped, so lower money costs would not have dictated Morgan's move.
Citibank the country's second largest bank last Friday revised the formula by which it sets its prime rate rather than follow its dictates and increase the rate to 7 per cent.
Bank of America had no comment on the Morgan Guaranty action.