Major commercial banks lowered their prime lending rate another one-quarter point yesterday to 11 3/4 percent, the fourth rate cut in the last six weeks.
But the modest cut, initiated by Citibank, the nation's second largest bank, was further evidence that the banks are reluctant to lower the prime, a reference rate to which most floating rate business loans are tied.
Financial analysts said that short-term money market rates have dropped far enough in recent weeks -- as a result of much slower growth in the economy and of a slight easing of the pressure on bank reserves by the Federal Reserve -- that a prime of 11 percent or even less was commensurate with the current cost the banks are paying to acquire lendable funds.
For instance, a major source of such funds, large certificates of deposit maturing in three-months, were yielding less than 9 1/2 percent yesterday.
Meanwhile, the Federal Reserve's policy-making group, the Federal Open Market Committee, met yesterday to set a course for policy for the next several weeks. Analysts were divided over whether the FOMC decided to ease, in the sense of providing the banking system with a relatively larger share of the reserves it must maintain against certain types of deposits, including those in checking accounts.
Most of the recent decline in interest rates seems to have been the result of a drop in the demand for credit associated with the much slower economic growth and the market's expectation that the Fed would ease in response to that slower growth.
The Fed has not resisted the drop in rates, however. And in September, most analysts believe, it explicitly eased by increasing the available share of required reserves by about $250 million. Any needed reserves not available within the banking system must be borrowed directly from the Fed.
The cost of reserves borrowed from the Fed is set by the discount rate, which is currently 9 percent. A growing number of analysts expects that short-term market rates will continue to decline in coming weeks and that the discount rate will be cut before November is out.
At the same time, forecasters generally think interest rates will start upward again if the pace of the economic expansion goes back up even to a 3 percent or 4 percent annual rate.
Major banks began lowering their prime rates on Sept. 27, when they cut the charge to 12.75 percent from the 13 percent level that had prevailed for three months. The rate was cut to 12.5 percent on Oct. 6, and then to 12 percent on Oct. 26.