What does the prime rate change?? Is it twice a year?
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When the BOC meets....
The Bank of Canada meets approx 10 times a year and they decide at that point whether or not to move rates. The meeting dates are scheduled way in advance so you can keep tabs on what's happening.
There's usually an indication ahead of time if they will move or not (in the media and in BOC press releases). However, in crisis situations they may call an emergency meeting and act at that point. There was a time in the 80's when this happened and I remember the overnight rate moved 200 bps up to prop up our loonie!
The spread between the overnight rate (the BOC prime) and the prime rate in a bank is generally 1.75% higher.
Fonz
The Bank of Canada meets approx 10 times a year and they decide at that point whether or not to move rates. The meeting dates are scheduled way in advance so you can keep tabs on what's happening.
There's usually an indication ahead of time if they will move or not (in the media and in BOC press releases). However, in crisis situations they may call an emergency meeting and act at that point. There was a time in the 80's when this happened and I remember the overnight rate moved 200 bps up to prop up our loonie!
The spread between the overnight rate (the BOC prime) and the prime rate in a bank is generally 1.75% higher.
Fonz
There may be others who have a better understanding of the prime rate than I, but my understanding is that it is the interest rate charged by chartered banks to their best corporate customers. It fluctuates at 1% or 2% above the bank rate which is set by the Bank of Canada. The prime rate does not change according to any set schedule such as once or twice a year, but rather follows the bank rate. The bank rate is used by the Bank of Canada to tighten or loosen credit, which in turn will affect how quickly or slowly the economy grows. It indirectly affects the value of government and corporate bonds, foreign investment and all kinds of other things that have to do with money.
You are correct, both in definition as well as characteristics. They do tend to follow the Bank of Canada overnight rate, and usually are at a premium, but this is not necessarily so. Each bank sets their own "prime" rate, and can change it whenever they choose.Questor said:
Sort of. The Bank rate is only really effective as a "signal" of the Bank's intention. Real monetary policy is executed by other means - primarily open market government bond transactions by the bank (the bank buys and sells bonds in the open market, thereby affecting money supply and interest rates), but they have other tools available if required (bank reserve requirements, etc.).Questor said:
The actual borrowing done at the overnight rate is inconsequential, so the importance of the Bank rate itself is limited to the impact of the announcements as a way to communicate the Bank's targets to other market participants. Moreover, it is an error to assume that the Bank of Canada "sets" rates... it heavily influences them, for certain, since they are the biggest player in the government bond market - but markets "set" interest rates. Even here in Canada....
Best regards,
F.
Most certainly, it means a lot. All the more important that people should know what it actually means. And suggesting that it is "tied" to the Bank of Canada overnight rate is incorrect (especially that there is some fixed premium to it, or that they may only change when the overnight rate changes), and can very easily lead to the wrong assumptions (e.g. they will only change on certain days... or that they are set at 2% above the Bank rate, etc.).peelcowboy said:
There is indeed competition, and Chartered Banks will find their rates very similar (as they will on all of their products)... especially when, like in recent times, monetary policy has been very accomodative. And the Bank of Canada does SIGNAL what they are going to do in the open market for government debt (the competitive market where interest rates are determined) with the overnight/Bank rate, which is far and away the biggest factor in short term interest rate determination (including Chartered Bank Prime).
But neither of these things ties the Chartered Bank prime rates, or rate change timing, to the Bank of Canada overnight/Bank rate decisions. Prime rates are set by MARKET changes in short term interest rates, and will occur WHENEVER market movements take place.
Best regards,
F.
Technically, the B of C does not set the overnight rate but only its range. The overnight rate is the interest rate at which chartered banks make overnight loans of reserves to each other. The Bank rate will be the upper limit of the overnight rate. This is because the bank rate is the rate at with the Bank of Canada will lend to the chartered banks. Clearly a chartered bank is not going to borrow from another chartered bank if it can borrow from the B of C at a lower interest rate. The lower limit is set by the Bankers’ deposit rate. This is the rate if interest the B of C pays on deposits the chartered banks keep with it. Clearly, one chartered bank will not lend to another if it can get more interest by simply depositing excess reserves with the B of C. Typically these two rate are set within ½% of each other. Through what is known as the term structure of interest rates, the bank rate will be related (but not in a definite fixed way) to other interest rates in the economy, including (as you say) the prime rate.peelcowboy said:
Although monetary economics is definitely not my area of specialization, I personally don’t think the banking industry in Canada is competitive (I can’t see competitive firms giving such horrible service). Nonetheless, the fact that they have identical primes is not really evidence that they are not competitive (I assume that is what you are implying). Indeed, price taking behavior is actually a characteristic of competitive markets. If every other bank is able to lend out their excess reserves at 10%, why would you charge 9%? As a customer, why would you borrow from a bank charging 11%, if all other banks charged 10%? The puzzle for an economist would be to explain why they banks were able to charge different interest rates if the prime rates were not identical.peelcowboy said:
BTW, I thought the original post you made that I responded to was pretty good. You should not take my nit picking of it as implying that you are not “smart”. That was not my intention.
bbking said:
Yes, it is true. You just don't read or understand well. Neither what I posted, nor your link. Again.
I never claimed the overnight rate does not INFLUENCE... I said that its influence is restricted to "information" value about what the bank is targeting for short term rates - signalling what they are going to do in the market. The overnight rate, as a true "cost of capital" to any of the Chartered Banks, is negligent - because none of the banks borrow significantly from the Central Bank (deposits are a much cheaper source of capital).
How the Bank really affects short term (hence Prime) rates is by buying and selling Treasury securities in the open market. They are a participant in the market - the largest participant, to be sure, but a participant nonetheless - and THIS market determines interest rates.
ALL interest rates are determined in the markets, and the market IS the sole determination. Including short term rates. Which, in turn, determine bank Prime rates. Without the Bank's open maket activity, the overnight target is just a suggestion.
Now read your link again (or, more likely, for the first time). Note where it says "When the Bank changes the Target for the Overnight Rate, this sends a clear signal about the direction in which it wants short-term interest rates to go."? That's what they mean. S-I-G-N-A-L. W-A-N-T-S. Get it? Do you understand that means that the overnight rate doesn't "determine short-term interest rates" (let alone Prime), like you claimed? Do you understand it's because the MARKET still determines whether or not it gets there, and the Bank of Canada is just announcing how it is going to act IN THE MARKET?
(...and yes - Bankers aren't idiots. They most often pay attention to the overt signal that the market's 800 pound gorilla is giving them. But if the signal is not followed up by the open market activity, the target rate is meaningless to short term interest rates....).
Virtually all monetary policy (of which interest rates are a facet) is executed via open MARKET activities.
F.
The mandate of Bank of Canada is to keep the inflation 'low' and thus a secure and safe currency. To be more specific, Bank of Canda will target the inflation to be around 2% until at least the end of 2006 . Actually, inflation is meant to be the core CPI.
The lates CPI is 1.9% http://www.bankofcanada.ca/en/cpi.htm
The last time Bank of Candaa raised the over-night rate was in October of 2004. http://www.bankofcanada.ca/en/target.htm
By following the CPI, you should have a good idea if David Dodge will raise the overnite rate, which eventually affects the prime, and your mortgage rate,...etc.
I believe the over-night rate used to be called the Bank Rate ? This is very similar to the Fed Fund Rate in the U.S. I stilll rememebr, during the early 90's
the Candian Bank Rate was always 200 base point above the U.S. Fed Fund rate.
The lates CPI is 1.9% http://www.bankofcanada.ca/en/cpi.htm
The last time Bank of Candaa raised the over-night rate was in October of 2004. http://www.bankofcanada.ca/en/target.htm
By following the CPI, you should have a good idea if David Dodge will raise the overnite rate, which eventually affects the prime, and your mortgage rate,...etc.
I believe the over-night rate used to be called the Bank Rate ? This is very similar to the Fed Fund Rate in the U.S. I stilll rememebr, during the early 90's
the Candian Bank Rate was always 200 base point above the U.S. Fed Fund rate.
No. As I posted before, the over night rate is the rate at which chartered banks make overnight loans to each other when the clearing process results in one having excess reserves and another being short. The bank rate is the rate at which the Bank of Canada will lend to the chartered banks. The Bank of Canada does not set the overnight rate but it does set the bank rate which puts an upper limit on the overnight rate (see my post on the previous page for more info). The Bank of Canada also sets the bankers’ deposit rate (the interest rate it pays on charted banks deposits with it) which puts a lower bound on the overnight rate (again see my post on the previous page for more info). The U.S. federal funds rate is like the bank rate in Canada but the U.S. system is different as American banks have required reserves that they have to keep (as used to be the case in Canada). For more info see either my earlier post or the link bbk posted.ice_dog said:
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They haven't always - most importantly, they don't HAVE to. Looking at a couple of years, especially in an extremely accomodative environment, doesn't mean the relationship has always been like that, or that it always will. Average (not uniform) prime to bank rate premiums have ranged from 2/3% to 2+%, and currently sit at 1.5%.peelcowboy said:
Why not look at your sarcastic, rhetorical question the other way. If Prime rates were always the same between Chartered Banks... and they were definitely tied to the Bank rate... why bother with quoting Prime rates at all? If your loan was given at Prime +1%, and Prime was ALWAYS 2% higher than the Bank rate, as you suggest... why not just give you the loan at the Bank rate +3%? After all, banks quote external rates in their loans all the time (e.g. LIBOR).
Unless (gasp), they WANT to be able to change their Prime rates independently of the Bank rate, if they feel like it... when they feel like it. Do you think? I mean... is it even possible? Because it sure does look like it....
Don't bother answering.
F.
Like any of their published rates, comparing "Prime" rates should not really be used as evidence of competition (all rates are negotiable, and the negotiation determines how much you actually pay...). As for your last question, take the example where Bank A has a Prime rate of 4%, and Bank B has a Prime rate of 5%, but Bank A only offers you a loan at Prime +2, and Bank B's best offer is Prime +.5%... Bank B is actually more competitive (5.5% vs. 6%), despite the published prime rates. Neither end rates are "published", so the discrepancy is only known to those who seek it out.someone said:
Rather than a measure of comparison, "Prime" should really be seen as just a mechanism to introduce interest rate variability into a contract.
Best regards,
F.
You may be right, but I really dont' care, because you spend way too much time worrying about the insignificat details, which does not address the original question.
The motivation to the original question is how often the prime rate is increased.
The simple answer is :
(1) If the core CPI looks like it is out of control, approaching 2%, David
Dodge will put on the break, increase the over nite rate by about 25 base
points
(2) All the Banks will then increase their prime.
So, the prime is not always changed twice a year.
Case in point:
Bank of Canada increased the over night rate to 2.5 on Oct 19,2004
All the Banks increased their prime to 4.25 the next day, Oct 20, 2004.
As far as an average joe is concerend, all he needs to know is if the prime will be increasing soon. My feeling is that there is a very good chance that the over night rate and the the prime, mortgage will be increased again before the summer. Reason is simple: CRB has been on up trend for qutie some time.
Okay, I just found out that Bank rate is really the upper limit of the band and the target over nite rate is the mid-point of the band. So what ! This is really academic.
The motivation to the original question is how often the prime rate is increased.
The simple answer is :
(1) If the core CPI looks like it is out of control, approaching 2%, David
Dodge will put on the break, increase the over nite rate by about 25 base
points
(2) All the Banks will then increase their prime.
So, the prime is not always changed twice a year.
Case in point:
Bank of Canada increased the over night rate to 2.5 on Oct 19,2004
All the Banks increased their prime to 4.25 the next day, Oct 20, 2004.
As far as an average joe is concerend, all he needs to know is if the prime will be increasing soon. My feeling is that there is a very good chance that the over night rate and the the prime, mortgage will be increased again before the summer. Reason is simple: CRB has been on up trend for qutie some time.
Okay, I just found out that Bank rate is really the upper limit of the band and the target over nite rate is the mid-point of the band. So what ! This is really academic.
someone said:
What you call insignificant details are the basis of how the system works. BTW it is not “you may be right”, I am right. Although monetary economics is not my area of specialization, the details of this stuff is one of the things I’m paid to teach when I am unfortunate enough to get stuck teaching undergraduate macro or money and banking courses.ice_dog said:
I don’t think you understand the current system. The Bank of Canada now only changes the Bank rate (which effectively put on upper bound on the overnight rate which is set by the chartered banks and NOT the Bank of Canada) on fixed dates. Not whenever Dodge decides. In any event, Fortunato, is right when he says that it is actually open market operations that have the major effect on money supply and interest rates. Nonetheless, when the bank rate changes, banks will take that as a signal when setting their interest rates.ice_dog said:
You asked if the overnight rate was the same as the bank rate (at least I assumed that is why you had a question mark). If you don't want your questions answered, why do you post them? Next time just keep your questions to yourself. For you ignorance seems to be bliss.ice_dog said:
Boy you’re a stupid person. First, you should know that university professors are researchers first and teachers second. Teaching second rate students like yourself (assuming that you even made it to university) is not the primary function of universities. I am willing to bet that if you ever even made it through university you were either a business or a liberal arts major. Except for teaching, those are the two majors that the intellectually challenged are the most likely to major in.peelcowboy said:
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Man, you guys have egos. 
If you want to know what Canada is doing with rates you have to look south. It is a fine line between keeping the loonie at an acceptable level for trade with the US and inflation.
Canada does not have much wiggle room with interest rates. It is closely tied to the US.
If you want to know what Canada is doing with rates you have to look south. It is a fine line between keeping the loonie at an acceptable level for trade with the US and inflation.
Canada does not have much wiggle room with interest rates. It is closely tied to the US.
You will have to refresh my memory, I don’t recall posting a "market forces comment on all interest rates”.bbking said:
Actually no. I’m not sure how your using the phrase “market forces”. If I understand you right, you’re using the term to mean “competitive”. In that regard, I never said banks in Canada were competitive, only that identical prime were not evidence one way or another in that regard. In fact, a characteristic of competitive markets is one price in the market (it is called price taking behavour). Fortunato has a point when he says that the prime may not be reflective of the true price in loan markets but that is does not change my argument (if we are referring to the same post I made and I’m not positive we we are).bbking said:
I have a hard time understanding why people are so excited about the overnight rate. Usually when I cover this stuff, I am meet with very bored stares.
God, you are a fool. A bank employee who does not know the first thing about interest rate determination is not going to be earning anywhere near what you claim. Believe me, I know. I work with someone who used to be an economist with the second largest bank in the world and even he was not earning that kind of money. I doubt if you have even meet David Dodge (who one-on-one is surprisingly frank for a central banker).peelcowboy said:
I think I see what you mean. I’d have to give that issue more thought before responding fully. However, given that the B of C sets its rates in anticipation of the future (as you likely know, there are long lag times between changes in monetary policy and effects on the real economy, so the B of C has to try to anticipate future events if its policy changes are going to have positive effects), even if changes in the prime are due to changes in the Bank rate were a “confirmation of an economic event”, that economic event is the B of Cs expectation of the future changing. However, I’ll give the point you raise some more thought.bbking said:
I think that this is one of the few issues that we have ever been in full agreement on.bbking said:
