Boston banker's 'feeling' -- interest to ease more
Richard D. Hill, chairman of the First National Boston Corporation, has a "feeling" that should delight millions. He feels that interest rates will come down further soon.Skip to next paragraph
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First National Bank of Boston, the corporation's bank subsidiary, joined the rush to reduce its prime rate from 20.5 percent to 20 percent Sept. 15. Mr. hill expects a "slow and gradual downward trend in rates" to bring the prime rate charged the bank's most creditworthy customers to the 15 to 17 percent level by the first quarter of 1982.
One reason for this expectation is a dropoff in loan demand. "Up to a couple of weeks ago, demand was staying extremely high," the chief executive of New England's largest bank noted in an interview. "Indeed, it stayed high all summer when we normally expect it to dip. . . . It almost reached a new high every two weeks."
Hill figures the credit demand was somewhat "artificial," since many companies were avoiding the long-term bond market because of its higher interest rates. Rather, companies were meeting their maney needs in the commercial paper market or through bank loans.
"The minute [companies] get any daylight in interest rates in the long-term area or begin to believe long-term rates aren't going to decline very much, then they will begin to go to the bond market and shift the credit demand from the short-term sector to the long-term sector," he said.
Today's high interest rates have already hit the housing and auto industries hard. Other industries had until now adapted relatively well to the high interest rates, Hill said. "They had been passing them [high interest costs] on to customers."
Companies are now finding more price resistance from their customers, however , along with stiff competition, and profits are starting to suffer.
"We are beginning to see it now in a lot of our middle-market borrowers and smaller business borrowers, who have been getting along pretty well in this whole high-rate era. We are now reaching the point where the strains are pretty great.One has to be concerned about the possibility of higher loan losses in the banking industry generally."
That's not the case for the banks' own profits, though. Hill said banks have been enjoying larger profit margins, offsetting to some extent the slim margins earlier this year. "There is a very proper tendency to hang onto margins," he said. "The direct relationship between our yields and loans and our cost of funds is now getting back to normal."
The Reagan administration, of course, has not been happy with the inclination of what it calls "Wall Street" -- meaning the financial community -- to hang on to high interest rates. But it will undoubtedly be pleased if Hill's "feeling" about interest rates coming down proves accurate.