Prime interest rate: What is it, and do we need it?

The Reserve Bank lends money to banks at the ‘repo rate’, the banks add 3.5% to create the ‘prime rate’ – which we hear when we buy a car or a house or use a credit card – and the Reserve Bank is now saying ‘Hang on, why do we add 3.5%? And does it have to be 3.5%?’. Just One Lap founder Simon Brown fills us in.