What is Prime Rate?

Prime rate (also referred to as prime) is a base rate that is set by financial institutions to determine the variable interest rates. While each financial institution can set its own rate, prime rates are influenced by the Bank of Canada’s (BoC) policy interest rate, which is an interest rate for one-day loans. This rate is used for variable loans or lines of credit.

In most cases, you will not pay the actual prime rate for your loan. Most financial institutions typically offer rates in terms of prime rate. For example, a line of credit interest rate might be prime rate plus 0.5%. It is not known how often or how frequently the BoC will modify their target rate, however on eight scheduled dates each year, the Bank of Canada announces the setting for the overnight rate target. As of January 2024, the prime rate was 7.20%.

Here is a glimpse of how the prime rate has changed over the last four years.

The interest rate on most loans is based on the prime rate. If the prime rate rises, the interest rates on your loans may rise (depending on the terms and conditions) which may increase your payments. Every situation and every institution have different policies when it comes to the prime rate, so it is not a one size fits all scenario. Products with a variable interest rate are the most common types to be affected by prime.

It is hard to predict what the financial future will look like as there are so many considering factors. In December, the Bank of Canada highlighted a high inflation reading as a reason for rates to remain high to get the inflation down to its targeted 2%. According to Rate Hub, if data continues to trend in the right direction as most expert observers are predicting, rates will remain steady for most of the year until the BoC begins to lower them at the end of 2024. If that happens and the prime rate goes down, borrowing interest rates will come down with it.