Top Banks Trim Prime Rate to a Nine-Year Low : Bellwether Now at 7 1/2%; Security Pacific Lowers Passbook Savings Rate

The nation’s major banks Tuesday lowered the prime lending rate to 7 1/2% from 8%, pushing the key interest rate to its lowest level in nine years.

The move comes in response to action last week by the Federal Reserve Board, which reduced the rate it charges on loans to financial institutions in an effort to spur domestic economic growth.

Wells Fargo Bank of San Francisco was the first major bank to follow the Fed signal, cutting its prime rate Monday afternoon. The rest of America’s big banks, including all of the major California institutions, acted Tuesday.

As a result of Fed pressure and low inflation, interest rates are falling across the board. The prime rate has been cut four times this year, and business borrowing costs are at a nine-year low. Mortgage rates have fallen to 1977 levels, while one major California bank is cutting the rate it pays on passbook savings accounts.

“You’re seeing a downward movement on the entire deposit rate structure,” said Jack Levine, first vice president and head of product management at Security Pacific National Bank in Los Angeles. Security Pacific this week lowered the rate it pays passbook savings depositors to 5% from 5.5%, which it had been paying on its basic savings accounts since early 1984. It paid 5.25% for five years before that.

Levine said he did not know whether other banks would follow Security Pacific and cut passbook rates. “That’s their call. But we’re all dealing in the same marketplace,” he said.

Money-market deposit rates, which fluctuate with other interest rates, have been dropping steadily all year. The major California banks are paying lower rates on money-market accounts, an average of 5.03%, than on passbook savings, which are holding steady at 5.5%, except at Security Pacific. Most banks have indicated, however, that passbook rates will be allowed to float and would probably be moving downward.

Leonard Weil, president of Mitsui Manufacturers Bank, also based in Los Angeles, said his bank would resist reducing its passbook savings rate, although in coming months competitive pressure may force all banks to cut the rates they pay depositors.

“Rates affecting consumers move much more slowly” than corporate and government interest rates, Weil said, referring to interest rates that individual consumers pay on loans as well as those the banks pay on deposits.

“Banks will be very reluctant to drop their passbook rates,” Weil added. “There’s a lot of history in these (passbook) rates. If people move their money out of their savings accounts, it will be very difficult to get them back again.”

The prime rate reduction was expected, as banks generally reduce their business lending rates in response to Fed discount rate cuts. The six-day lag between the Fed’s action and Tuesday’s prime rate decreases is unusual. Observers attributed it to profit taking by the banks and to the need for one major bank to take the lead.

Economists were uncertain, however, whether the interest rate reductions would stimulate a sluggish economy. “To a large degree, you can argue the Fed already has offered a lot of stimulus to the economy,” said Ward McCarthy, senior money-market economist at Merrill Lynch in New York.

“Interest-sensitive sectors--housing, automobiles, sales of goods and services--are healthy,” McCarthy said. “The problem is that a disproportionate amount of consumer spending is going into imported goods. The Fed is fighting the battle of the bulging trade deficit. Lower interest rates alone will not necessarily cure that problem.”

Many economists believe that the Fed’s latest rate cut was intended in part to boost the domestic economy by further depressing the foreign exchange value of the dollar in an attempt to increase overseas demand for U.S. products.

A weaker dollar makes U.S. products relatively cheaper overseas while making foreign goods more expensive in this country. The dollar has fallen sharply against the currencies of major U.S. trading partners in the past year, but its effect on the trade deficit was not expected to materialize until later this year.

The White House and the Fed have been pressuring Japan and West Germany to match the latest discount rate cut to stimulate their own economies and demand for U.S. products, but so far those two nations have resisted such a move.