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Prime interest rate

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The prime interest rate, also known as the “prime rate,” is the interest rate commercial banks charge their most credit-worthy business customers. It is a baseline rate upon which all floating rate loans are negotiated (for example, prime + 3%).

The prime rate is set by financial institutions in a competitive fashion. It is based on the overnight rate that is set by the Bank of Canada.

More about the prime interest rate

In Canada, the overnight rate is the average interest rate that the Bank of Canada wants to see in the marketplace for one-day (overnight) loans between financial institutions.

A broad range of financial institutions and government agencies are active in the overnight markets where they can lend or borrow money until the next business day when faced with a temporary surplus or shortage of funds. This market has the shortest term to maturity—literally overnight—and is highly liquid.

Related definitions

Find out more in our glossary

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