The target overnight rate is a key Bank of Canada-controlled interest rate used as a basis for one-day (or “overnight”) borrowing between major lenders and financial institutions. This rate plays a pivotal role in influencing the economy.
How Does the Overnight Rate Affect the Prime Rate? When the overnight rate is increased by the central bank, it becomes more expensive for banks to borrow money from one another, increasing their total cost.
To make up for this increase in costs, banks increase their prime rates, which makes borrowing money for customers more expensive. In essence, banks pass the increased cost onto the consumer.