A major New York bank lowered its prime lending rate from 13 1/2 percent to 13 percent yesterday, the lowest rate for two years.
Other major banks did not immediately follow yesterday's move by Bankers Trust, and analysts said there may be a split prime for a while with some banks staying at 13 1/2 percent and others moving down to 13 percent. The rate has been at 13 1/2 percent since late August, when it ended a month-long slide from the 16 1/2 percent level that had prevailed since late February.
There is considerable confusion at the moment about the likely course of interest rates, analysts said. Continued weakness in the economy suggests that inflation may decline more than expected and interest rates could drop further, according to Elliott Platt of Donaldson, Lufkin and Jenrette.
However, the money supply has been growing above the Federal Reserve's target range recently, and was higher than the Fed expected both in August and so far in September, a New York analyst said yesterday. This could mean that the Fed is now tightening credit conditions mildly, he added.
The Federal Funds rate, charged on interbank borrowing of overnight money, has remained close to 10 percent.
Other money market rates, which fell sharply during the summer, have remained fairly steady this month, while long-term interest rates have continued to decline.
Many economists hope the drop in rates since June will start to push the economy into recovery soon. There is little sign of this as yet, however. Administration officials have warned that the Index of Leading Indicators -- a guide to the likely future course of the economy -- will show a decline for last month when it is released this Thursday. Many experts fear September unemployment will climb above 10 percent. The unemployment figure will be released Oct. 8.
The prime rate is a base rate, from which commercial banks often calculate how much interest to charge to all short-term borrowers.
The housing and construction industry has been particularly hard hit by the high interest rates during this recession. The value of new construction contracts, however, climbed last month by a seasonally adjusted 14 percent from July, F. W. Dodge reported yesterday. The Dodge index was boosted by the inclusion of two large electric power plants in Florida and Louisiana, which added $1 billion to the $13.9 billion August total.
"Nevertheless, without these large projects, August's data would still have shown a solid 5 percent improvement over July's rate of contracting," George A. Christie, vice president and chief economist for Dodge, said yesterday. He noted that since April the Dodge index has risen for four months in a row, if very large projects are excluded from the numbers.
Contracts for residential building totalled $5.4 billion in August, after seasonal adjustment, up 6 percent from July and one percent from a year ago.
Meanwhile, the Commerce Department reported yesterday that foreign affiliates of U.S. companies plan to increase spending on new plant and equipment by less than 0.5 percent next year, bringing total capital spending by the foreign affiliates to $46.6 billion.