Most of the nation's major banks lowered their prime business lending rates from 13 percent to 12 percent yesterday, the lowest level in more than two years, and the drop in interest rates helped send stock prices soaring again.
Along with the decline in the prime rate, interest charges paid by consumers are beginning to fall as well, although at a slower pace.
Yesterday, Manufacturers Hanover Trust Co. of New York, the nation's fourth biggest bank, announced that it was cutting its rates on personal loans by as much as two percentage points. Last week Chemical Bank of New York cut all consumer loan rates one-and-a-half percentage points.
Investors anticipate that lower interest charges will be both a real and psychological stimulant for the slumping economy and will make it easier for debt-ridden companies to stay in business.
The psychological impact of lower interest rates continued to move the stock market. The Dow Jones Industrial Average, probably the most closely watched barometer of stock market performance, climbed 11.40 to 1,015.08 during one of the heaviest trading days in New York Stock Exchange history. Nearly 140 million shares of stock changed hands yesterday, marking the fifth consecutive day of 100 million-plus share trading.
The move to a 12 percent prime rate was initiated Tuesday by Morgan Guaranty Trust Co. of New York. A few big banks followed Morgan that day and most others came into line yesterday.
The prime rate, the interest charge on which most business loans are based, has fallen from 16 1/2 percent three months ago because the cost to banks of obtaining funds has declined dramatically since late June. In late June, a bank that "bought" a three-month deposit had to pay about 15 percent. Yesterday, according to Douglas Ledwith, chief financial officer of American Security Bank, three-month funds cost about 9 percent.
Rates are falling both because the recession is reducing loan demand and the Federal Reserve Board has eased its tight monetary policy. The Fed now appears to be more worried about a continued recession than inflation, the problem its tight money and credit policies were designed to fight.
Further evidence of the duration of the recession came yesterday with a Commerce Department report that inventories of unsold goods rose 0.4 percent in August. Robert Ortner, chief economist of the Commerce Department, said the inventory figures leave little doubt the recession continued in August but the outlook for September is better.
In other economic reports, the nation's auto makers said that sales in the first 10 days of October were slightly higher than for the same period a year ago, but still were weak.
Business bankruptcies rose to 598 last week after two weeks of declines, Dun & Bradstreet Inc. said yesterday. The figure was well above the average of 479 business failures a week this year and the average of 327 last year, the credit rating service reported.
During a three-year recession in their industries, housing and auto producers have said that a steep drop in interest rates would revive their businesses. Industry leaders are saying that the recovery point is coming closer but has not yet been reached.
Many banks, large and small, have reduced consumer loan rates in the last few weeks as the cost of funds has come down. However, bankers said, because there are larger fixed costs in consumer lending and consumer loans tend to be made for several years, retail rates will be higher than short-term business borrowing rates like the prime.
At American Security, for example, the automobile loan rate is 15 1/2 percent today, compared with 18 percent on July 1. Unsecured personal loans, which cost 21 percent on July 1, cost 18 percent now. The mortgage rate, which was 17 3/4 percent two months ago, is 14 7/8 percent today. Nevertheless, that rate remains higher than most home buyers are able or willing to pay.
Automobile sales may be the biggest beneficiary of the cut in the prime rate and consumer rates, although high unemployment and low consumer confidence will continue to deter many potential new-car buyers, industry analysts said.
Ford Motor Co. president Donald E. Petersen predicted that if the prime drops below 12 percent, "we will definitely see sales strengthen." A 12 percent prime rate "gets buyers in," agreed L. Ray Windecker, a Ford analyst, even though the car loan rates are higher than 12 percent.
Robert Daly, chief spokesman for the National Automobile Dealers Association, said he cannot pick a prime rate that would prompt buyers to return to showrooms. He said, however, that the high prime rate "spooked a lot of customers out of the marketplace. Now with the news about the rates coming down, we hope to see them coming back in."
The government has taken the lead in lowering home financing costs, with a full percentage point reduction this week in the allowable rate on single-family home loans insured by the Veterans Administration and the Federal Housing Administration. The new rate of 12 1/2 percent took effect yesterday.
Mortgage rates at a sample of savings and loan associations averaged 15.1 percent in the first week of October, the Federal Home Loan Mortgage Corp. reported. It was about two percentage points below averages this spring and the lowest figure in nearly two years.