Citibank yesterday jumped the prime rate a half percenage point to 10.75 percent, and thus leapfrogged the move to 10.5 percent that had been initiated just three days ago.
A number of major banks followed the move to 10.75 percent, including Continental Illinois and The Mellon Bank of Pittsburgh, and analysts predicted the new level would spread quickly.
Capital spending by U.S. business in 1979 is meanwhile expected to increase by a very weak 2 percent in real dollar terms, according to the McGraw-Hill fall survey of spending plans.
The survey, however, was conducted in September and October and preceeded the recent sharp surge in interest rates that observers believe could prove to be an even more severe deterrent to business spending for new plant and equipment next year.
Citibank normally uses a formula based on a spread over the commercial paper rate to set the prime rate which it charges to its most credit worthy corporate customers.
But the country's second largest bank said it ignored the formula yesterday because the action by the Federal Reserve Board in the past few days to boost the dollar by aggressivley lifting interest rates had not yet been reflected in the commercial paper rate.
Citibank said that it was "anticipating the rate which strict adherence to the formula would produce the following week."
The Fed, meanwhile, intervened in the money markets yesterday to drive down the federal funds rate when it reached 10 percent. Analysts said they believed the Fed's target was now 9 7/8 percent.
"The fact that the Fed undertook repurchases when the rate reached 10 percent is a very disappointing signal." said Lawrence Kudlow, an anlyst with Paine Webber. "It undermines the credibility of the program they undertook a few days ago. They can't absorb dollars under swap arrangements and then provide new reserves in the money market at the same time and expect any progress in curbing the growth in the money supply."
Most analysts, however, expected federal funds to be at 10 percent by next week. And a federal funds rate of 10 percent implies a prime rate of about 11.5 percent.
The survey by McGraw-Hill, which polls 600 companies that account for more than half of U.S. manufacturing, reported that businesses will spend $171.43 billion for plant and equipment in 1979, an increase of 10 percent over this year.
But after subtracting for what is expected to be 8 percent inflation, the spending increase in real dollar terms comes to only 2 percent, well off the 5 to 6 percent minimum that the Carter administration beleives is necessary to sustain economic growth through 1979.
Eric Herr, civce president for economics, said respondents see "slow growth, high inflation and a highly uncertain world", ahead for 1979. He said the bleak survey results were so far below what other capital spending indicators are currently forecasting for next year that real spending might come in a little higher than the businessmen predicted.
The money supply dropped a record $5.4 billion in the most recent statement week, the Fed reported on Thursday, leading to some predictions that the climb in interest rates may be near its peak.
"But if the survey is correct, the administration forecast will be disappointed severely," he added.