Chemical Bank, the nation's sixth largest, dropped its prime lending rate a full percentage point to 19 percent yesterday.
The move came in the wake of a large drop in the money supply, reported by the Federal Reserve late Friday. The fall in the money supply could indicate the beginning of an economic slowdown, which would reduce loan demand and interest rates, analysts said.
Marine Midland Bank of New York previously had the lowest prime among major banks, at 19 1/2 percent. Manufacturers Bank of Los Angeles followed Chemical's lead and reduced its rate to 19 percent yesterday, but other major banks held off. They may move today or later this week, analysts said.
Administration and private economists expect the economy to grow more slowly, or even falter, over the summer after rapid growth early in the year. Industrial production figures for May are scheduled for release today and are widely expected to show the economy weakening. Unemployment rose sharply last month, according to official figures published recently.
Meanwhile, the Commerce Department yesterday reported a rise in business inventories of $2.5 billion in April, after a $1.6 billion increase the previous month. An unintended buildup in inventories often comes at the start of a recession, as sales do not keep pace with business' expectations.
The inventory figures from Commerce showed a slight rise in the inventory-to-sales ratio of business from 1.36 in March to 1.37 in April.
Market analysts differed yesterday about the likely speed and extent of any fall in interest rates. David Jones of Aubrey G. Lanston & Co. said it's important to stress that the Fed will not "open the credit floodgates" now just because the spring bulge in money growth has ended.
In addition, the Fed last week reported a big increase in business loan demand. "Business could be borrowing to finance an unintended buildup in inventories because of a slowing in sales," commented William Sullivan of Bank of New York. "We still face credit pressures in June that could cause a bulge in the money supply," he added.
The Fed has tightened credit sharply in recent weeks, driving up the cost of funds for banks. It is committed to firm control of the money supply, putting it above the risk of a recession or economic slowdown caused by high interest rates. The administration also has urged a tight money policy on the Fed.
However, Morgan Stark, senior vice president at Chemical Bank, said the bank's decision to drop the prime a point was "based on current economics, monetary aggregates and our cost of money." He said he expects that "this trend will continue at least over the short haul and that borrowing costs and financing costs will come down in the weeks immediately ahead."
Jones said he thinks that the key federal funds rate, which is the interest that banks charge one another for overnightloans, could come down to between 16 percent and 17 percent from its present range of 18 percent to 19 percent. It topped 20 percent recently. However, "the expected strong loan demand and the Fed's reluctance to ease [the money supply] quickly could limit drops in the prime to the 18 percent level for the near term," Jones said.
The administration has forecast a sharp decline in interest rates as a result of its economic program. But some senior officials have admitted recently that this decline probably won't be as swift or as early as first hoped.