SOME CONSUMERS BEEF ABOUT `PRIME CUT'

"Lower Interest Rates In Store" said the headlines when the Federal Reserve dropped the prime interest rate to 5.5 percent from 6 percent April 30. Consumers, holding their breath to see the lower rates, are turning purple and may be seeing red.

The lower rate has not affected the consumer market loan rates. Mortgage interest rates have remained stable and in some cases edged higher.

"Real estate loan rates have not reacted," said Jay Knudtson, a real estate loan officer at Boatmen's National Bank of Cape Girardeau, which makes a sizable number of the area's mortgage loans. "It's due to loans existing in a good interest environment already. I thought they would react but they have not adjusted." He expected a possible .25 percent decline.

The reduced loan rates that have evaded most consumers instead have favored big business. Major loans to commercial and agricultural concerns now have reduced rates, because these are tied directly to the prime. Banks peg these at their corporate base rates, which is equal to the prime rate or slightly above, depending on the customer, size of loan, and other factors.

The lone benefit to consumers of the prime rate cut has been in home equity loans and adjustable rate mortgages. Both are normally tied to prime. However, adjustable rate mortgages, popular a few years ago, have been largely displaced by fixed rate loans. Home equity loans are consumer loans piggybacked on a homeowner's mortgage, which allows interest to be deductible on federal income tax.

The drop in the prime rate has pros and cons. "It has an up side and down side," said Boatmen's local CEO Jim Limbaugh. "With a drop in the interest rate environment, commercial accounts can take advantage, but investors' income is reduced." He said the national economy runs most smoothly when the interest rate is around 9 to 10 percent.

Knudtson believes mortgage rates would be more likely to fall if the Fed drops the prime rate again. It met last week but took no action.

Economists predict another reduction could come in June, particularly if the nation's jobless rate continues climbing and the recession continues.

Knudston said the demand for loans locally has advanced lately, following a slowdown during the Persian Gulf War and the earthquake scare late last year. He believes the psychological impact of the earthquake projection may have been one of the largest obstacles this area has experienced.

Banks are hesitant to drop loan interest rates as they face higher operating costs. Federal Deposit Insurance Corporation premiums are going up again, rising to 23 cents per $100 of insured deposits. The current rate of 19.5 cents is a substantial increase over the former 12.5 cent rate for banks. The FDIC's reserve ratio dropped to .42 percent at the end of 1990.

Banks are also hiking loss reserves as non-performing loans increase. Boatmen's Bancshares, the parent company of the local bank, boosted its loan loss reserve this year to $20.5 million, 42 percent more than the 1990 level of $14.4 million.

While consumer loan rates have not dropped, consumer deposit rates have dropped. Interest rates for money market accounts and six-month certificates of deposit for the most part are now below 6 percent. Most one-year CDs are just above 6 percent interest. Retirees depending on interest income from savings are feeling a pinch with reduced income.