Morgan Guaranty Turst Co., the nation's fifth-biggest bank, today lowered its prime lending rate from 19 1/2 percent to 19 percent, and most analysts expect most other major banks will lower their prime rates by the end of the week.
Citibank, New York's largest, will hold its regular weekly meeting Tuesday to set its prime rate, and observers believe Citibank will follow Morgan and lower the rate to at least 19 percent.
But some money market analysts believe the prime rate could go lower than 19 percent soon.
Under an old formula that some banks, such as Citibank, used to determine the prime lending rate, the prime rate should be about 18 1/4 percent, according to William Sullivan, vice president of the Bank of New York.
"Banks have been slow to reduce their prime rates," Sullivan said. "It's obvious they are trying to recapture some of the profits" they lost when short-term interest rates skyrocketed last November and December and banks could not raise the prime lending rates as fast as the costs of funds rose. To obtain the funds they need to satisfy their business customers' needs, banks sell securities, such as certificates of deposit, in the open market.
Since December, when rates in the money market reached a peak, the rates on certificates of deposits have declined more than 3 percentage points -- from close to 20 percent to about 16 1/2 percent -- while the prime rate has fallen at most banks from a record 21 1/2 percent to 19 1/2 percent.
The federal funds rate, the interest banks charge each other for overnight loans of excess reserves and a major tool of Federal Reserve monetary policy, also has declined markedly since December. At one point the rate traded close to 20 percent, while today it fell below 17 percent.
Besides the decline in costs of obtaining funds to lend, banks also are under pressure to lower their prime lending rate to attract business they have been losing to other types of borrowing, which is less expensive than prime rate loans. Since the first of the year, business loans at banks have declined by $3.7 billion. Part of that decline is a normal, post-Christmas ease in corporate credit demands. But during the same period, commercial paper outstanding has climbed by $5 billion.
Commericial paper is a short-term corporate promissory note, essentially an IOU, that companies in need of cash sell to other companies with spare cash. The rates on commericial paper, which is issued by the same kind of top-quality corporation that can obtain funds from a bank at the prime rate, average about 16 1/2 percent.
While most analysts expect the prime rate to continue to decline -- perhaps to as low as 17 percent within the next few months if market interest rates fall some more -- the interest rate outlook for the spring is less clear.
"I'm a little nervous about the spring," said Leon Gould, an economist with Commerical Credit Corp., a major user of commercial paper.
Gould said that the economy has been stronger recently than most economists expected and that, if the economy continues to produce at a strong clip, demand for credit will not subside. The government is expected to borrow at least $36 billion before the end of March and as much as $100 billion all year (although the Reagan administration estimates borrowing will be about $80 billion).
Heavy government borrowing coupled with strong private credit demands will push up interest rates, Gould said.
In addition, the Federal Reserve, the central bank and architect of the nation's monetary policy, has said that it intends to keep a tight rein on the growth of money in the economy to fight inflation.