Bank of America Trims Its Prime Rate to 8.75%

Bank of America lowered its prime lending rate Wednesday to 8.75% from 9%, surprising bankers and economists who were not expecting such a move by a major bank for several weeks.

Economists and analysts said that although Bank of America’s move puts pressure on other banks to lower rates, they doubt that others will follow immediately.

Unlike many banks, San Francisco-based B ofA, the main unit of BankAmerica Corp., is flush with funds. Also the cost of funds for many banks has not been sustained long enough at lower levels.

Bank of America’s cut to 8.75%, effective today, is the first move to that level this year by any of the nation’s major banks. It came hours after Federal Reserve Chairman Alan Greenspan suggested to a Senate panel that the Fed has the flexibility to force interest rates lower because inflation is being kept in check.

Frank McCormick, Bank of America’s senior vice president and senior economist, cited two reasons for the move: a lowering in the bank’s cost of funds and Greenspan’s comments.

“He left the door open to a further decline in short-term interest rates,” McCormick said.

The prime is traditionally what banks charge their best customers. It also is important as an overall benchmark rate, and small-business and home-equity loans are sometimes tied to it.

Although many economists and analysts have expected lower rates in the next few months, they said they were surprised by Bank of America’s timing.

P. Kenneth Ackbarali, senior vice president and chief economist with First Interstate Bancorp in Los Angeles, said banks usually like to see rates for certificates of deposit sustained at lower levels for longer periods.

“My surprise isn’t that the rates have come down. The surprise is that it is happening now, in the middle of February rather than a few weeks from now or a month from now,” Ackbarali said.

Some speculated that the cut was timed as a marketing move, adding that it will put a national spotlight on Bank of America.

“My guess is that they are probing for some loan demand here,” said Donald K. Crowley, a bank analyst with Keefe, Bruyette & Woods in San Francisco. “They are very flush with funds right now. They have to be one of the most liquid banks.”

Bank of America was one of the leaders in lowering the prime rate at the end of December, when banks cut their rates to 9.5% from 10% in the wake of moves by the Fed to push rates lower. Banks subsequently lowered their prime rates again to 9% in late January and early February.