Newspaper article THE JOURNAL RECORD

Analysts Say Prime Cut to 9 1/2 Question of `When,' Not `If'

Newspaper article THE JOURNAL RECORD

Analysts Say Prime Cut to 9 1/2 Question of `When,' Not `If'

Article excerpt

NEW YORK (UPI) - Banks will lower their prime rate to 9 1/2 percent from the current 10 percent as soon as the Federal Reserve cuts its discount rate again, economists said Monday.

""Money market rates so far in June have drifted down to levels that certainly would be consistent with a lower prime rate,'' said William V. Sullivan, Jr., senior vice president at Dean Witter Reynolds. ""But banks are awaiting sanction from the Fed in the form of another discount rate cut.''

Tiny Southwest Bank of St. Louis, mostly a consumer bank, dropped its prime to 9 1/2 percent Monday.

But the industry is expected to wait a while to make the move that would reduce this base rate for business loans into single-digit territory for the first time since September, 1978.

David M. Jones, economist at Aubrey G. Lanston & Co., agrees with Sullivan that banks are waiting for a cue from the Fed before lowering their prime.

""It's not a matter of if the prime will come down, it's only a question of when,'' Jones said.

""Most banks continue to keep their profit margins as wide as possible as long as they can to make up for costly loan mistakes,'' Jones said. ""The prime will continue to march down but the timing could be delayed.''

Banks are experiencing earnings reductions and losses from non-performing loans in Latin America and domestically in real estate, agriculture and energy sectors.

Sullivan said banks also are under pressure from regulators to increase their capital. ""One way to do this is with retained earnings, so in effect the regulators are encouraging banks to delay prime rate cuts,'' he said.

A lower prime rate would be welcomed by medium- and small-size businesses, whose loan charges are based on the prime. …

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