Canadian Bank Raises Prime Rate to 11 3/4%

Royal Bank of Canada, the country’s largest commercial bank, said Thursday that it is increasing its prime rate to 11 3/4 from 11 1/2%.

The move was designed to offset its high cost of borrowing money from the government.

But within hours, the government raised the Central Bank rate, extending what economists called an extremely unusual situation in the country’s financial markets.

The -point prime-rate increase was made as Royal Bank acted to bring the interest rate it charges its biggest and best corporate customers above the rate it must pay to borrow funds from the Canadian central bank.

The government increased the Central Bank rate to 11.81% from 11.52%, prolonging the unusual imbalance. Economists said there had not been a similar situation in Canada since the early 1970s.

The Central Bank rate for the past week has been higher than the prime rate at major Canadian banks.

Royal Bank’s rate increase becomes effective today, and increases are also likely by other Canadian banks. Some economists have predicted that the prime rate could go to 12% or even higher.

Fierce competition for loan business, currently slack in Canada, has made banks reluctant to raise the prime rate.