Chemical Bank, the nation's sixth-largest, today lowered its prime lending rate to 17 1/2 percent, the second time this week that the key interest rate has been cut.
But, unlike Tuesday, when all major banks followed Citibank's prime-rate reduction from 18 1/2 percent to 18 percent, no other important banks cut their key business lending rates in reaction to Chemical's move.
Industry analysts, however, expect other banks to follow shortly. Not only are interest costs declining in the open market -- where banks buy most of the funds they in turn lend to customers -- loan demand at domestic U.S. banks has been weak in recent months. Foreign banks have been seeking U.S. customers aggressively, and the rates in the commercial paper market -- where big companies can raise funds for periods of up to 270 days by issuing what amounts to IOUs -- are much lower than the prime rate.
The Chemical Bank announcement, which came at 2:40 p.m., was unexpected so soon after the Tuesday reduction. Banks have been noticeably slow to cut their prime lending rates as other interest rates declined, in part because banks want to recoup some of the profits they lost when interest rates shot upward in November and December.
The Chemical cut helped propel an already-ebullient stock market. The Dow Jones industrial average of 30 stocks climbed 22.15 points today, its biggest one-day rise of the year.
Thomas S. Johnson, executive vice president of Chemical Bank, said that the main reason for the prime-rate reduction was the continuing decline of rates the bank has to pay to sell its large-sized certificates of deposit and to buy so-called federal funds. Federal funds are excess reserves banks lend each other, usually overnight. The rates on federal funds are controlled to a large extent by the nation's central bank, the Federal Reserve.
Johnson said that federal funds appear to be under 15 percent for good. These funds were trading in the range of 16 percent to 17 percent less than two weeks ago, although lower than that toward the end of February. Rates on certificates of deposit, he said, have dropped more than 1 percentage point in the last week and about one-half percentage point in the last two days.
The prime lending rate is the interest rate banks charge their best corporate customers for a short-term loan, usually lasting between three months and a year. rates are usually lower for shorter-term loans.
Banks have come under pressure from Rep. Ferdnand St Germain (D-R.I.), chairman of the House Banking Committee, for making it seem as if the prime rate were the best rate a company can get when in fact banks make loans to big corporations at less than the prime rate.
Most bankers argue that they never have claimed the prime rate was the best rate available but say it is the rate at which most short-term business loans are made, and the rate off which other business loans are keyed.
Chemical's Johnson said he expected further interest-rate reductions in the weeks ahead, but said he doubted they would occur "in a smooth pattern."