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Bank Lowers Prime Rate to 10 1/2 Percent; Others May Follow

July 29, 1989

SAN FRANCISCO (AP) _ Bank of America is lowering its prime lending rate to 10 1/2 percent because of its own declining borrowing costs and further signs of a weakening economy, and analysts say other banks should quickly follow.

The move, effective Monday, follows Chase Manhattan Bank, which dropped its prime on July 10 by the same half percentage point. The decline was the second in as many months, bringing the prime rate to the level at which it stood at the start of 1989.

Analysts said they expected most other major banks to quickly lower their prime to the same level. Bank of America is the nation’s second-largest bank.

″They weren’t the first and they won’t be the last,″ said stock analyst J. Richard Fredericks with Montgomery Securities in San Francisco.

Bank of America chief economist John Oliver Wilson cited the falling federal funds rate - the rate banks charge each other for overnight loans - and signs of a slowing economy as the main reasons for the move, which was announced Friday.

The prime, a laggard among other interest rates, is a benchmark banks use to set interest on a variety of consumer and business credit, including home- equity lines of credit. It also determines the rate for many credit cards.

Wilson said the Federal Reserve Board has shown signs of loosening its grip on the nation’s money supply in reaction to a continued slowdown in economic growth and an easing of inflation.

Analysts expected most major banks to follow Chase Manhattan’s lead in lowering their prime rate once they were certain the federal funds rate would remain near or below 9 percent, thereby confirming the Federal Reserve’s policy to depress interest rates. The rate was 815-16 percent late Friday.

Reflecting banks’ continued dropping costs of funds, the average yield on six-month certificates of deposit fell to a national average of 8.47 percent last week, compared with 8.52 percent the previous week and the 8.8 percent range in late June, according to the newsletter Bank Rate Monitor.

In the bond market, another indicator of general interest rate trends, the yield on the 30-year Treasury bond finished at about 7.98 percent Friday, its first close below 8 percent since April 8, 1987.

Wilson said the bank’s second reason for lowering its prime was the week’s economic news ″shows definitely that the economy is slowing down.″

A slowdown in the U.S. economy tends to ease the risk of inflation, thus allowing the Fed to pursue a strategy of reducing interest rates.

Wilson cited reports on Friday by the Commerce Department that personal incomes rose a lackluster 0.3 percent in June as consumer spending - which accounts for two-thirds of U.S. economic activity - declined for a second straight month. He also cited two months of negative growth in industrial production.

″With this kind of interest rate and economic news across the board, I’d expect the money center banks and big regional banks to do the same - soon,″ said banking analyst Michael Abrahms of Bateman Eichler, Hill Richards Inc. in Los Angeles.

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