Chase Manhattan Bank today raised its prime interest rate to 7.25 per cent from 7 per cent effective immediately.
The move by the country's third largest bank is expected to be followed widely by other major banks, as a result of a regent climb in short-term money market rates.
That climb in turn is the result of a new deliberate tightening in monetary policy by the Federal Reserve Board to contain surging money supply figures.
The prime rate is that charged by banks to their best corporate customers and also serves as a benchmark for other rates. The prime began the year at 6 per cent and has been climbing in tentative one-quarter per cent steps in response to higher short-term rates brought about by the Fed's policy moves and in spite of sluggish loan demand from corporate borrowers at the big New York and Chicago money center banks.
The last increase in the prime came on Aug. 19 when Citibank led the way with a 25 per cent increase to 7 per cent, Citibank, which uses a formula related to money market rates, could have increased the prime again last Friday but elected to wait another week to see if the trend toward higher interest rates is confirmed.
Since April, firming by the Fed has caused short-term rates to rise nearly 1.75 per cent, more than the increase in the prime by 0.5 per cent, with the latest jump coming in the last few days.
Last Thursday the Fed announced an unexpected $3 billion jump in the basic money supply, or MI, consisting of cash and checking account deposits, and a $4 billion jump in M2, which also includes saving deposits, causing rates to ratchet higher.
Continued outsize increases in the money supply have the potential to reignite inflation, but the Fed is also faced with criticism if higher interest rates reduce borrowing and hamper what is already being viewed as a sluggish economy.
In the last few days the sensitive federal funds rate, or what banks charge each other for overnight borrowing, has gone up nearly 50 per cent as a result of tightening with the Fed's new target for the rate somewhere between 6.125 and 6.375 per cent.
But money market observers are saying that the lastest tightening may be it for the year, and that both short-term rates and the prime could stay level for the remainder of 1977.
Leonard J. Santow, a vice president and economist with Schroders Inc., predicted that the prime will probably stay at 7.25 per cent for the next few months.
"We will probably stay relatively stable for the rest of the year," Santow said. "I don't think the growth in the money supply - which seems inconsistent with what's going on in the economy - will persist. No one can understand why the money supply growth has been so strong when real GNP (gross national product) growth has been decreasing.