Rise in prime hits Maryland harder than most

March 25, 1994|By Joel Obermayer and Ian Johnson | Joel Obermayer and Ian Johnson,Sun Staff Writers

The national economy may be surging so strongly that it needs a stiff dose of higher interest rates, but Maryland's battered economy may well feel that it's being kicked in the teeth as it tries to get up.

With the Federal Reserve's decision on Tuesday to raise its funds rate by one quarter of a percent, other banks have been quick to raise rates too. Yesterday, a dozen major banks, including Bank of America, J. P. Morgan & Co., NationsBank and First Fidelity Bancorp. the prospective owner of the Bank of Baltimore, raised their prime lending rates from 6.0 percent to 6.25 percent.

The Fed's decision to raise the federal funds rate -- the rate for overnight loans between banks -- was prompted by strong growth in the nation's economy that could lead to inflation. By raising rates now, the Fed hoped to head off inflation before it becomes a serious problem.

But economists said the timing was poor for Maryland because the state's recovery has lagged the rest of the country.

"The move by the Fed and the banks is unfortunate, especially for the Baltimore area," said Charles McMillion, president of MBG Information Services, a Washington-based economic consulting service.

Mr. McMillion said there has been little increased demand for goods and services -- one of the leading causes of inflation -- in the Baltimore area. As an example, he pointed to the Consumer Price Index for Baltimore, which rose only 2 percent in 1993.

That low demand regionally will likely mean low job growth as well.

Last year, Maryland ranked 40th among states in employment growth, with an increase of 1.2 percent, according to David Donabedian, vice president and chief economist for Mercantile Bankshares Corp.

"I don't think the disparity is going to be that great this year. But you will see employment growth that is not as good as the rest of country," Mr. Donabedian said.

While changes in employment levels take time, changes in the prime rate affect consumers quickly.

Financing of mortgages and car purchases in the Baltimore area already costs more than it did last week.

A 30-year mortgage at a fixed rate of 7.5 percent for a $150,000 home last week would have required monthly payments of $1,049. The same loan today costs an additional $26, according to Paul Havemann, a vice president with the mortgage firm HSH Associates in Butler, N.J.

"That doesn't seem like much until you realize that over the first five years that's a difference of almost $2,000," he said.

And these days interest rates on car payments often rise faster than the prime rate itself.

"It makes sense," said Rex A. Mayfield, sales manager at Doug Griffith Chrysler Plymouth in Carney. "Ford and Chrysler borrow money from the Fed. If the rates go up, they're going to pass it on to the customer."

The amount paid for a Chrysler Concord, with a suggested retail price of $21,491, financed over 60 months, increases by $156.60 for every quarter of a point rise in interest rates, he said.

Credit card interest rates also are often tied directly to the prime rate.

More worrisome is that costs to consumers are likely to increase even more because economists believe there will be additional interest rate increases this year.

"The time to buy a new home, refinance an old one or get yourself a new set of wheels is now -- not in 1995 because then it's going to cost you more money," said Robert K. Heady, publisher of Bank Rate Monitor, an industry newsletter in North Palm Beach, Fla.

This time consumers and the markets were warned by Fed Chairman Alan Greenspan that rates were likely to increase.

"It doesn't usually work as neat and clean as it has," said Mr. Donabedian. "Chances are going forward, either as economic data becomes available or bond or stock markets move dramatically, the Fed won't have that luxury."

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