Interest Rate/
April 10, 2019

By: Jessie Banwait

Interest Rate/
April 10, 2019

Tags: Market, Interest, Rate

To have a better understanding about how interest rate works in Canada, we need to know first the difference between Prime interest and overnight interest.

The prime rate is the interest rate that commercial banks charge their most creditworthy customers. Generally, a bank's best customers consist of large corporations. The prime interest rate, or prime lending rate, is largely determined by the federal funds rate, which is the overnight rate that banks use to lend to one another.

        

The prime rate in Canada is currently 3.95%. It is also known as the prime lending rate, and is the annual interest rate Canada’s major banks and financial institutions use to set interest rates for variable loans and lines of credit, including variable-rate mortgages. The prime rate is primarily influenced by the policy interest rate set by the Bank of Canada.
 
The overnight rate is the interest rate at which a depository institution (generally banks) lends or borrows funds with another depository institution in the overnight market. In many countries, the overnight rate is the interest rate the central bank sets to target monetary policy, in this case would be the Bank of Canada, which is the main of the Country.

               

The Bank of Canada has decided to keep its benchmark interest rate unchanged while it digests the impact of its previous policy decisions and effect of drastically lower oil prices on the economy.
The bank's rate directly affects the rates that Canadian consumers get from retail banks. When the central bank increases its interest rate, it makes borrowing more expensive, but it's good news for savers.
 

Interest rate changes


We can observe in the table below, all the changes in the interest rate from 2014 with an interest rate of 3.00% to 2018 3.95% with a total increase of 0.95% within 4 years.