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Variable Mortgage Rate - Increase

RBC has hiked its variable mortgage rates without waiting for the central bank to move first.

Canada's biggest bank is moving to cushion its bottom line as profit from mortgage lending is being squeezed from prolonged low interest rates and the increasing cost of funds for the bank.

"Due to global economic concerns, the funding costs for banks have been increasing," it said in a statement. "While we have held off in passing on these high costs to our clients, it is now necessary for us to increase this mortgage rate."

RBC will increase the rates on its five-year variable closed residential mortgages by 0.20 percentage points. As a result, the price of its current special offer rate is now prime minus 0.45%, or 2.55%, and its five-year variable closed rate will sit at prime.

The Bank of Canada is expected to keep its overnight rate at near record low levels for the rest of the year, given the uncertain economic conditions, with some economists saying the likelihood for a second global recession is rising.

Desjardins Securities is even more bearish, saying in a recent report that the central bank is likely to stand pat until mid 2013.

Governor Mark Carney began raising rates from their record low of 0.25% in June last year but was forced to pause in September, after three hikes, as prospects for the global economy darkened.

Usually, the variable mortgage rates offered by commercial banks closely mirror movements in the central bank rate. The same isn't true for fixed-rate loans, which tend to track trends in the bond markets.

"This is not the first time that the price for variable rate mortgages is changing relative to prime without a corresponding change in the BoC rate," RBC said. "The BoC rate is just one among many factors that goes into the pricing decision."