Prime rate cut to 5.5% by Morgan Skepticism voiced on lift for economy

October 19, 1993|By Ian Johnson | Ian Johnson,New York Bureau

NEW YORK -- A leading bank cut its prime lending rate yesterday to the lowest rate in 21 years, a move that could spur other banks to cut their rates and make borrowing cheaper for consumers and businesses.

Morgan Guaranty Trust Co. said it cut its prime lending rate -- the rate for its best customers -- to 5.5 percent from 6 percent. Harris Trust and Savings Bank, a large regional bank in Chicago, immediately followed suit.

The move came a month after two regional banks announced similar cuts and could signal that the nation's top banks are ready to lower interest rates.

Economists, however, were skeptical that the cuts would help the economy very much.

While lower rates should theoretically help spur demand for money and boost economic activity, few think that borrowers are confident enough to want the money very much.

Banks have been criticized for keeping their interest rates on loans high, although they can borrow money cheaply from the U.S. Federal Reserve Board.

The difference between the banks' prime rate and the amount that banks can borrow money from the Fed is 3 percentage points -- a record high. After yesterday's move, the difference for Morgan Guaranty is 2.5 percent.

Low inflation and a sluggish economy make it likely that the Fed will keep its lending rates low, so the banks can feel confident about cutting their own rates, said Dan Seto, an economist with Nikko Securities.

Another consideration is that banks have rebuilt their balance sheets, which had many bad loans on them from the 1980s. Now many think that lending money is the best way to increase profits, Mr. Seto said.

"The banks are still able to borrow cheaply and lend out the money at a much higher rate, so their profits are high. But it looks like they're now willing to forgo a portion of that rate in hopes of attracting new borrowers," Mr. Seto said.

The increased borrowing, however, may only be marginal, said Mickey Levy, chief financial economist with NationsBank Capital Markets Inc. The reason: Interest rates are falling because the economy and loan demand are weak, so low rates alone are unlikely to turn the economy around, Mr. Levy said.

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