Central bank, e.g. US Fed or Bank of Canada, which manages the nation's monetary policy with the dual mandate of keeping inflation under control and keeping unemployment low. The trouble for the Fed is that it can use its main tool, changing the all-important fed funds rate, to lower inflation or encourage employment, but not both at the same time.
When inflation is running too high, the Fed raises the fed funds rate, pushing up interest rates on all kinds of loans and slowing the economy, aiming to reduce spending and allow supply and demand to rebalance. The fed did this in 2022 to combat the post-pandemic surge of inflation.
When unemployment is high, the Fed can lower the fed funds rate, pushing down borrowing costs. Easy money tends to make business boom and employers hire more. The Fed chopped interest rates to near zero when the pandemic hit in 2020, reviving an economy that had suddenly plunged into a recession.
Source: https://www.investopedia.com/how-would-the-federal-reserve-fight-stagflation-11700516
----------- Prime rate and central bank rates. Source from Internet ------------
The prime rate, which banks use as a base for loan products, is influenced by the Bank of Canada's policy interest rate (also known as the target for the overnight rate). As of March 25, 2025, the prime rate in Canada is 4.95%, and the Bank of Canada's policy rate is 2.75%.
Here's a more detailed explanation:
Prime Rate:
· The prime rate is the interest rate that banks use as a base to determine interest rates for various loan products, like mortgages and lines of credit.
· It's the lowest variable rate a bank can offer its most creditworthy customers.
· Each financial institution sets its own prime rate, which is influenced by its cost of funding, which in turn is influenced by the Bank of Canada's policy interest rate.
· As of March 25, 2025, the prime rate in Canada is 4.95%.
Bank of Canada's Policy Interest Rate:
· The Bank of Canada sets the policy interest rate, which is the target for the overnight rate, to influence the overall direction of the Canadian economy.
· This rate is the rate at which commercial banks can borrow money from the Bank of Canada.
· As of March 12, 2025, the Bank of Canada reduced its policy interest rate to 2.75%.
· The Bank of Canada's policy rate is the rate at which financial institutions lend funds to each other for a period of one day.
Relationship between Prime Rate and Bank of Canada's Policy Rate:
· The prime rate is generally set at a spread above the Bank of Canada's policy rate.
· Historically, this spread has been around 2.20%.
· When the Bank of Canada adjusts its policy rate, it can influence the prime rate, as banks adjust their own rates accordingly.
For example, if the Bank of Canada lowers its policy rate, banks may also lower their prime rate.
-------------- Prime rates. Source from Internet -----------------
The prime rate is the interest rate that financial institutions use as a basis for determining loan interest rates. The prime rate is also known as the prime lending rate.
How it works
· Each financial institution sets its own prime rate.
· The prime rate is based on the cost of funding for the institution.
· The cost of funding is influenced by the overnight rate target set by the Bank of Canada.
· Examples of loans based on the prime rate Home equity loans, Home equity lines of credit (HELOCs), and Adjustable-rate mortgages (ARMs).
Current prime rate in Canada
· As of March 24, 2025, the prime rate at RBC Royal Bank and the Bank of Montreal is 4.95%. This is the same rate posted by most major financial institutions in Canada.
How prime rate changes affect loans
· When the prime rate increases, the interest rate on loans may also increase. This can lead to higher monthly payments for borrowers.
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