The prime lending rate continued its downward spiral today as Morgan Guaranty Trust Co., the nation's fifth-largest bank, slashed its rate two percentage points to 14 percent.
The prime had reached a seven-month low of 14 1/2 percent just last Friday as banks across the country cut their rates in an effort to stimulate sluggish loan demand.
Following Morgan Guaranty to the 14 percent rate were No. 3 Chase Manhattan Bank, No. 8 Bankers Trust Co. and No. 9 First National Bank of Chicago.
Other banks that posted 14 percent prime rates included Manufacturers Bank of Los Angeles, First Union National Bank of Charlotte, N.C., American National Bank of Chicago and UMB Bank and Trust.
None of the major banks that had posted a 14 1/2 percent rate last Friday reduced their rates further Tuesday. Provident National Bank of Philadelphia lowered its 16 percent rate to 14 1/2 percent.
The prime is the rate banks charge on loans to their most creditworthy corporate customers. It does not apply to consumer loans but is considered an indicator of which direction other interest rates are moving.
The Federal Reserve Board reported last week that commercial and industrial loans on the books of the nation's major banks fell $929 million in the week ended May 14. That followed a drop of $1.37 billion the previous week.
Morgan, Chemical Bank and Crocker National Bank also lowered by a full point to 12 1/2 percent their broker loan rates, the interest they charge securities brokers for loans.
Now 6 percentage points below its record high of 20 percent in April, the prime rate still is high by traditional standards. The prime was 11 1/2 percent last June; three years ago it was 6 3/4 percent.
The decline in record high interest rates follows sharp changes in Fed policy.
To lower the nation's inflation rate, the Fed last October adopted a restrictive monetary policy to reduce growth in the nation's money supply. But inflation continued strong -- 18.1 percent on a compound annual rate for the first three months of 1980 -- so on March 14 the Fed took new steps to sharply curtail growth in credit.
Over-extended consumers stopped buying and the economy slipped into an apparent recession. Retail and auto sales slumped badly, unemployment increased as plants closed, and interest rates began to fall.
Facing a sharper than expected recession and seeing the first sign of slower inflation -- consumer prices rose by a relatively mild 0.9 percent in April -- the Fed last week eased its credit restrictions. It cut in half the 15 percent special noninterest-bearing deposit it required on lenders offering consumer credit and for money market mutual funds.
This resulted in another round of interest-rate reductions by major banks last week. Along with the decline in business interest rates, consumers have benefited from lower mortgage and other loan rates, although the decline in the consumer area typically has been slow in coming.