Several major commercial banks boosted their prime lending rate 0.25 per cent to 8 per cent today, with one banker citing a growing economy and rising demand for funds as a factor in the increase.
Citibank, the nation's second largest bank and often a trendsetter in prime rate changes, was the first to announce the increase. Other banks raising their prime rate to 8 per cent were Bank of New York and Marine Midland Bank.
Major holdouts included first-ranked Bank of America in San Francisco and third-ranked Chase Manhattan in New York.
The prime rate, a bank's charge on short-term loans to its best corporate customers, is not directly linked to personal or mortgage loan rates.
Meanwhile, the bank of England today cut its minimum lending rate 0.5 per cent to 6.5 per cent, signalihngcheaper borrowing for britons.
With the pound sterling hovering at the $2 mark at mid-week, London's financial quarter had confidently predicted a cut in the MLR to ease the flow of "hot money," into Britain.
Interest rate are one method countries use to control the value of currencies. "Hot money," or uncommitted international funds that are invested in countries where interest rates are highest, can sometimes put undesirable upward pressure on a currency.
After the United States came to the aid of the dollar Wednesday, there was some uncertainty over the possibility of a massive outflow of money from London. But the reverse happened.
After a tumble to $1.8880 Thursday, the pound started rally to its present level of around $1.91. This was enough for the bank to nod approval to doday's cut.
Domestically, this points the way to lower bank charges and strengthens the case for cheaper home loans.
The MLR, with the exception of an increase in November, has been on a steady downward trend from its all-time crisis level of 15 per cent in October, 1976, when the pound was under extreme pressure.
In New York, analysts said long-term prime rate trends may influence the cost of consumer borrowing even though "it's not one, big, homogeneous loan market," said R. Gene Conaster, vice president and economic research director at Bank of America.
The prime rate had been at 7.75 per cent since last November. Lief Olsen, vice president and chief economist of Citibank, contended today's increase was "symptomatic of a growing economy."