Prime Rate

The Prime Rate is the Interest Rate that commercial banks charge their most Creditworthy customers, typically large Corporations. It serves as a Benchmark for various lending products, including loans and Credit cards. The Prime Rate is influenced by the Federal Funds Rate set by the Central Bank, as it reflects the cost of borrowing for banks.

For instance, if the Prime Rate is 5%, a bank may offer loans to businesses at Prime Rate plus a Margin, such as 5.5%. This means the loan’s Interest Rate would be 10.5%. Similarly, consumers might see variable Interest Rates on Credit cards linked to the Prime Rate, which can fluctuate based on economic conditions.

In cases where the economy is strong and the Central Bank raises the Federal Funds Rate to coMBAt inflation, the Prime Rate typically increases, leading to higher borrowing costs for businesses and consumers. Conversely, during economic downturns, the Prime Rate may decrease, making borrowing cheaper.