In Canada, the "prime rate" and the "overnight rate" are both important interest rates, but they serve different purposes and have different effects on borrowers and savers.
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Prime Rate:
- The prime rate is the interest rate that commercial banks in Canada offer to their most creditworthy customers.
- It is used as a benchmark for setting interest rates on various types of loans, such as mortgages, personal loans, and business loans.
- The prime rate is influenced by the Bank of Canada's policy interest rate, but it is set by individual banks. Banks typically set their prime rate slightly above the Bank of Canada's overnight rate.
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Overnight Rate:
- The overnight rate, also known as the policy interest rate or key interest rate, is the interest rate set by the Bank of Canada.
- It is the rate at which commercial banks lend and borrow money among themselves on an overnight basis to meet their reserve requirements.
- The Bank of Canada sets the overnight rate to control the country's money supply and influence economic conditions. For example, if the Bank of Canada wants to stimulate economic growth, it may lower the overnight rate to encourage borrowing and spending.
In simple terms, the key difference is that the prime rate is the interest rate offered by banks to their customers, while the overnight rate is set by the central bank (Bank of Canada) and influences the overall cost of borrowing and economic activity in the country. When the Bank of Canada changes the overnight rate, it can indirectly affect the prime rate, which, in turn, impacts the interest rates consumers and businesses pay on their loans.
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