What is prime business rate or prime rate?
Simply saying - a prime business rate is the rate at what banks lends money to their the best customers. The rate is closely tied with Bank of Canada target overnight lending rate. In other words it can be said that the Prime business rate is always a bit higher than that Bank of Canada (Canadian lender of last resort) has to offer. The prime business rate is an important factor in our day-to-day life because some of our loans such as variable rate mortgage, HELOC, Credit lines are directly related to this rate.
Bank Prime Rates are usually two percentage points higher than BOC overnight lending rate (in 2012). This is generally the trend for last few years. This difference used to be lower in past.
Governing Council of Bank of Canada is responsible for making the interest rate decision. This council is comprised of the Governor, the Senior Deputy Governor and four Deputy Governors.
Canadian Prime rate
This chart gives you an idea of how Canadian fixed and prime rate look like over last 35 years. From this historical chart you can see that the Prime rate (which decides the variable rate mortgage) is usually lower than the 5yr. fixed mortgage rate. Banks usually charges a premium or gives a discount on these rates based upon long-term forecasts. Lately Bank of Canada has increased the prime rate few times. Industry experts are saying that there might be a pause this time.