Bankers Trust Co. of New York, the nation's sixth-largest commercial bank, yesterday cut its prime lending rate to 10 percent, the lowest level for the rate in more than six years.
No other major bank immediately followed, but a number of financial analysts said they expect the lower rate to be adopted soon by most banks. The reduction of half a percentage point was the first since January, when the rate dropped from 10 3/4 percent to 10 1/2 percent.
"This cut clearly comes as no surprise, and in fact was long overdue," said William V. Sullivan Jr., senior vice president at Dean Witter Reynolds. "Money market rates had reached levels that justified it several weeks ago."
With the economy not growing strongly, business credit demand has slowed and interest rates have fallen during the past two months. Most short-term rates, after rising sharply during February and early March, are back down to their January levels.
For instance, the yield on large certificates of deposit maturing in 90 days, a source of lendable funds at many major banks, is close to 8 percent after being at 9 percent or so during most of March. The 2 1/2 percentage point spread between the yield on 90-day CDs and the 10 1/2 percent prime lending rate was unusually large.
Thomas Parisi, a Bankers Trust spokesman, said the prime rate cut reflected declines in rates "pretty much across the board" on money market instruments that the bank uses to get funds. "Our own judgment is the decline is a real decline, and our expectation is that rates would either stabilize at this level or, perhaps, trend down still further," Parisi said.
At the same time, banks and other financial institutions have been reducing the rates they pay on money market deposit accounts and smaller CDs issued to customers.
Robert Heady, who publishes the newsletter Bank Rate Monitor, told the Associated Press that its survey of 50 leading commercial banks, savings and loan associations and savings banks nationwide showed the effective annual yield available on money market accounts fell to 7.65 percent as of yesterday from 8 percent in mid-February.
Some banks may have decided to wait just a bit longer to get a better fix on what sort of monetary policy changes the Federal Reserve may make. There is a widespread expectation that the Fed will cut its 8 percent discount rate -- the interest rate financial institutions pay when they borrow money directly from the central bank -- sometime soon.
The Fed's policy-making group, the Federal Open Market Committee, meets next Tuesday, and analysts said a decision to ease policy a notch could be taken at that session. If so, part of the shift could be a cut in the discount rate, which could take other short-term interest rates down with it, analysts said.
Sullivan at Dean Witter Reynolds said, "You can't rule out a split prime, with some banks at 10 1/4 percent, until there is a clearer fix on the economy and Fed policy."
The prime rate is used by many institutions as a reference point in the pricing of floating rate loans, with the rates actually paid by many businesses stated in terms of the prime rate plus some premium. Some consumer loans, including home equity loans, also are tied to the prime.
From July until October last year, the prime was 13 percent. As economic growth and credit demand slowed in the second half of the year, money market interest rates and the prime fell in a series of steps. When short-term rates rebounded in February, the prime did not go back up.
Now, with some borrowers turning increasingly to the commercial paper market to raise funds rather than borrowing from banks, competitive pressures and that wide spread between the cost of funds and the prime led to yesterday's cut, the analysts said.