Financial Update

TSX hits highest level in 4 months-Markets take flight on signs of hope

Low Inflation Sets Up Cut In Bank Rate

· TSX + 248.53 to close over 14,099-the first time in 4 months
· Dow + 256.80
· Dollar continued upwards +.1.73c to almost par $ $99.86US
· Oil hit a new record for the 3rd day in a row and is already at $115US per barrel this
morning
· Gold +16.40US to $945.10US

Bond Rates: http://www.bankofcanada.ca/en/rates/bonds.html

Financial Post Gas, mortgages, food provide biggest push to 2.2% annual rate
The chance of a half-percentage-point cut in the bank rate next month has increased, and most of the market is now expecting a steeper cut after the weakest annual inflation reading since August last year.

Inflation fell 0.2% last month, pulling the 12-month rise in consumer prices down to 2.2% from 2.4% in December, Statistics Canada figures showed yesterday.

Dawn Desjardins, senior economist at RBC Financial Group, said overall inflation fell because of lower car prices and the 1% goods and services tax cut on Jan. 1 -- estimated to have shaved 0.6% off the pace of inflation.

But lingering inflationary pressures remained, with gasoline and mortgage rate costs continuing to rise, Ms. Desjardins said.

Gas prices jumped almost 21% from a year earlier and were up almost 15% from December, while mortgage costs increased by 7.6% from January, 2007.

Food prices also increased notably in the month, up 0.6% for an annual increase of 1.4%.
The core consumer price index, which excludes volatile items such as gasoline and food, inched up 0.1% in the month for an annual pace of 1.4%. The core result was the lowest reading since July, 2005, and sat well below the central bank's inflation target of 2%.

The decline in inflation supports the case for a more aggressive easing in monetary policy, with the market also looking for more rate cuts as insurance against credit market risk and a U.S. economic slowdown.

The new Bank of Canada governor Mark Carney said on Monday more rate cuts were on the way following the quarter-point cut in January.

"We expect that the overnight rate will be cut 50 basis points at the March 4 policy meeting with an additional 50 basis points in rate cuts to come at subsequent meetings to bring the rate to 3% by mid-year," Ms. Desjardins said.

Overnight indexed swaps show investors have now priced in a 60% expectation that the Bank of Canada will cut the overnight cash rate by 50 basis points to 3.50% at its next meeting on March 4. The swaps indicate a 25% expectation of a 25-basis-point cut, Eric Lascelles, chief economist and rates strategist at TDSecurities said.

Mr. Lascelles said the GST cuts masked the strong upward pressure on inflation from food, gas and mortgage cost prices, but he still expects a 50-point cut in March.

"We know the Bank of Canada likes to move relatively slowly, but I think the case is strong enough right now to make a bigger move," he said. "But it's pretty clear, one way or the other, the Bank of Canada is going to cut and the inflation story simply gives them room to do so."

He said the Bank of Canada looks through tax adjustments when deciding policy.
With tax cuts removed from the calculations, core inflation rose by 0.2% on the month and headline inflation was up 0.6%, Mr. Lascellessaid.

Nevertheless, Mr. Lascelles does not expect inflation to pose a problem in the near-term, with the strong Canadian dollar likely to continue to drive consumer prices lower.

Douglas Porter, deputy chief economist at BMO Capital Markets, said the Canadian dollar was the dominant factor behind the lower inflation figures, with the loonie appreciating about 40% since July, when core inflation peaked at 2.5%.

Mr. Porter expects a 25-point cut in March, and an overnight target rate of 3% by the end of the year.

The prospect of lower interest rates caused a sell-off in the Canadian dollar, which dropped almost a cent to close at US98.32¢ yesterday.
amcmullen@nationalpost.com