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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