Manufacturers Hanover Trust, the nation's fourth-largest bank, yesterday lowered its prime lending rate from 11 1/4 to 10 3/4 percent, the lowest rate in more than a year.
Analysts yesterday said they expect other banks to follow the lead of Manufacturers Hanover, although perhaps with smaller reductions.
Manufacturers Hanover Trust already was among the major banks offering the lowest prime rate before it dropped the rate again yesterday.
In response to the announcement of the lower rate, the stock market suddenly rebounded in the last 15 minutes of trading, with the Dow Jones industrial average turning a loss into a gain of 0.88 point.
It is the lowest prime rate since July 1983, when several major banks offered 10.5 percent.
The Manufacturers Hanover rate cut followed trading of federal funds -- the rate at which banks lend each other money -- below 8 percent for most of the day. Earlier in the day, Bankers Trust lowered its broker loan rate -- which is between the federal funds rate and the prime interest rate -- to 9.25 percent from 9.5 percent.
The action also came as yields on Treasury bills dropped below 8 percent to their lowest levels since Feb. 28, 1983. The government yesterday sold $6.8 billion of three-month bills at an average discount of 7.97 percent.
The prime-rate drop was fueled by speculation that the recent decline in short-term interest rates was being sanctioned by the Federal Reserve Board, whose policymaking arm met yesterday and is meeting today to decide monetary policy for the next two months.
The Fed has provided more reserves to the banking system recently in an effort to bolster economic growth. That modest easing of monetary policy plus slower economic activity has helped push down short-term rates, which are a major cost for banks.
In addition, analysts said financial markets believe that the Fed will continue the rate decline this week by lowering the discount rate -- the interest the Fed charges banks for loans -- from 8.5 percent to about 8.0 percent.
The prime rate is generally a lagging interest rate because it follows the movement of short-term rates. Banks usually maintain a spread of about 1.50 percentage points between the prime rate and rates for certificates of deposit, another major cost for banks.
However, that spread has been about 2 percentage points in the last three months. "What has become clear at this point is there's been a substantial movement in the federal funds rate, and it's going to stay down," said William Griggs, managing director of Griggs & Santow, financial analysts. "The Fed seems to be endorsing this lower rate structure."
A spokesman for Manufacturers Hanover said the bank decided to lower the prime because it believes short-term rates will continue to decline.
Many economists have said that a decline in interest rates could lead to a rebound in economic activity. Recent economic statistics may have begun to bear that out.
Yesterday, the Fed reported that the operating rate of the nation's factories, mines and utilities rose from 81.4 percent to 81.5 percent last month, the first increase in four months.
The increase in capacity utilization followed a report last week showing that production at the nation's industries rose 0.4 percent after two monthly declines. That report was one of the first bits of evidence that the economy may be moving at a faster pace than it has since the summer.
However, a major reason for the pickup in industrial production and use of capacity in November was the increase in operation in the automobile industry following a two-week strike against General Motors Corp. and a subsequent automobile strike in Canada that affected the supply of parts for U.S. manufacturers.
The capacity utilization report "does reflect some positive growth in the economy," said Alan Murray, an economist with Citicorp Information Services. "The major factor is automobiles, and they're, of course, catching up after some problems they had earlier because of the strike.
"There's no reason we can't continue to get increases in industrial production and some gradual rise in capacity utilization," Murray said. "On the other hand, it is a very small increase" last month.
The utilization rate for manufacturing, mining and utilities in November was still below the 81.9 percent rate in September, but above the 69.6 percent rate during the 1981-1982 recession. The average for 1967 to 1982 was 82.4 percent.
The operating rate for manufacturers was 81.9 percent, up from 81.7 percent in October. For mining it was 74.8 percent, up from 74.2 percent in October, and the rate for utilities was unchanged from October at 83.0 percent.
Earlier in the year, the use of the nation's capacity rose rapidly, suggesting to some economists that, if demand exceeded industries' ability to produce, shortages and bottlenecks would occur, leading to severe price increases.
Those fears have been dampened by both the increase in purchases of plant and equipment, which can be used to increase capacity, and the influx of equipment from abroad.