
                         Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: FRIDAY, March 25, 1994                   TAG: 9403250220
SECTION: BUSINESS                    PAGE: B-5   EDITION: METRO 
SOURCE: By MAG POFF STAFF WRITER
DATELINE:                                 LENGTH: Medium

IT WORKS ON OUR MINDS

Virginia's major banks increased their prime rate a quarter-point Thursday, following the lead of national, money-center banks. While the increase should have only a slight impact on consumer costs, a bigger price may be psychological, one analyst said.

Christine Chmura, economist with Crestar Bank in Richmond, said many more consumer loans are tied to the prime rate than in the past. She said this is especially true of home equity lines and loans with floating rates.

Virtually all commercial lending moves directly with the prime, which went up Thursday from 6 percent to 6.25 percent. The prime is the rate banks charge their most highly rated business customers. Commercial lending rates are based on prime plus percentage points.

But at a quarter-point, Chmura said, that the impact on consumer lending rates should be very small.

Savings rates eventually should rise slightly, too, Chmura said, but savings deposit interest lags behind changes in the loan rates.

"The bigger impact is psychological," she said, "because the mind-set now is that rates are going up." That expectation affects how people will react in their spending patterns.

Short-term rates, such as the prime, are rising in response to the Federal Reserve Board's action earlier in the week to increase the rate banks charge each other for overnight borrowing. That rate went up a quarter-point to 3.5 percent. There was a similar jump a few weeks ago.

Long-term rates are another story, Chmura said.

She said she thinks bond yields have risen too sharply in recent weeks, because traders overestimated the impact of interest-rate increases.

Chmura said bond yields should drop again later this year. And that, she said, would be good news for home buyers, because mortgage rates would drop as well.

Large banks doing business in Virginia increased their rates effective Thursday or today, depending on the bank.

Posting higher primes were Central Fidelity, Crestar, First Union, First Virginia, NationsBank, NBC Bank and Signet. The increase was effective immediately at all banks except Central Fidelity and Signet, where it becomes official today.

by CNB