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TORONTO: The Canadian dollar moved higher Tuesday as risk aversion receded while investors keep an eye on another day of big anti-government protests in Egypt.

The currency was up 0.43 of a cent to 100.28 cents US after closing slightly below parity for the last two sessions as unrest in the Middle East persuaded investors to seek the safe havens of U.S. Treasurys and commodities such as oil.

Oil prices relaxed after surging about eight per cent over the last two sessions on worries that protests against the rule of president Hosni Mubarak could spread or force a closure of the Suez Canal. The waterway is a key route for oil tankers and cargo ships as they steer from the Persian Gulf to the major oil-consuming nations in Europe.

On Tuesday, the March crude contract in New York eased 53 cents to US$91.66 a barrel.

Bullion prices edged higher with the April contract on the Nymex up $4.40 to US$1,338.90 an ounce while March copper on the Nymex added three cents to US$4.49 a pound.

The U.S. dollar weakened against other currencies including the euro as Standard & Poor's gave Spain a welcome boost by affirming its AA credit rating Tuesday. The move was another sign that the government debt crisis that threatened to sink the European currency has come off the boil, at least for the moment.

The agency said Spain's current, solid AA rating partly reflects the government's resolve to cut its deficit and enact reforms to make its struggling economy more productive.

Meanwhile, Standard & Poor's became the second major credit agency in as many days to downgrade its rating on Egypt. The agency warned Tuesday that the political instability and unrest will hamper Egypt's economic growth and hurt its public finances.

As a result, it says it is reducing its long-term debt rating on Egypt by one notch to BB.

S&P says it expects the violent demonstrations will persist despite the appointment of a new vice-president and the dismissal of the previous government by President Hosni Mubarak.

On Monday, Moody's also downgraded its view on the country.

OTTAWA: The higher cost of filling up at the gas station pushed Canada's overall inflation rate up to 2.4 per cent in December, a jump of four-tenths of a point from the previous month.

Statistics Canada said Tuesday gasoline prices were 13 per cent higher in December than they had been 12 months earlier, when the world was emerging from a deep recession.

The increase in gasoline prices was also mostly responsible for the 0.3 per cent rise in consumer prices from November to December on a seasonally adjusted basis, the agency said.

December's increases helped contribute to a general growth in consumer prices throughout 2010.

For the year, Canada's inflation rate averaged 1.8 per cent, much higher than the 0.3 per cent average in 2009, when inflation at times dipped below zero.

``For 2010 as a whole, prices increased in seven of the eight major components...the exception was clothing and footwear,'' the agency reported.

``Prices rebounded in the transportation and shelter components _ rising in 2010 after declining in 2009 _ driven by price increases for energy and passenger vehicles.''

Still, economists note that inflation remains relatively tame in Canada. The much-watched **>Bank<** of Canada core index, which excludes volatile items such as energy, rose only one-tenth of a point in December to 1.5 per cent. That is still well below the central **>bank<**'s desired target of two per cent.

But for the energy component, so-called headline inflation would also be well anchored below two per cent at 1.8 per cent.

Energy costs were higher across the board last month. Along with gasoline, natural gas rose 9.2 per cent from last year, electricity 6.2 per cent, and transportation costs, which are heavily influenced by gas prices, rose 4.9 per cent.

Inflation pressures on most other items measured by Statistics Canada tended to be more moderate. Consumers paid 4.3 per cent more for passenger vehicles; 2.7 per cent more for shelter, 1.7 per cent more for food, and 1.7 per cent more for household operations, furnishings and equipment.

Meanwhile, mortgage interest rate costs declined 2.5 per cent in December and clothing and footwear fell by two per cent on an annual basis.

Regionally, the agency said consumer prices rose in every province last month. Ontario continues to have the highest inflation rate in the country at 3.3 per cent.

OTTAWA –The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.

The global economic recovery is proceeding at a somewhat faster pace than the Bank had anticipated, although risks remain elevated. Private domestic demand in the United States has picked up and will be reinforced by recently announced monetary and fiscal stimulus. European growth has also been slightly stronger than anticipated. Ongoing challenges associated with sovereign and bank balance sheets will limit the pace of the European recovery and are a significant source of uncertainty to the global outlook. In response to overheating, some emerging markets have begun to implement more restrictive policy measures. Their effectiveness will influence the path of commodity prices, which have increased significantly since the October Monetary Policy Report (MPR), largely reflecting stronger global growth. 

The recovery in Canada is proceeding broadly as anticipated, with a period of more modest growth and the beginning of the expected rebalancing of demand. The contribution of government spending is expected to wind down this year, consistent with announced fiscal plans. Stretched household balance sheets are expected to restrain the pace of consumption growth and residential investment. In contrast, business investment will likely continue to rebound strongly, owing to stimulative financial conditions and competitive imperatives. Net exports are projected to contribute more to growth going forward, supported by stronger U.S. activity and global demand for commodities. However, the cumulative effects of the persistent strength in the Canadian dollar and Canada’s poor relative productivity performance are restraining this recovery in net exports and contributing to a widening of Canada’s current account deficit to a 20-year high. 

Overall, the Bank projects the economy will expand by 2.4 per cent in 2011 and 2.8 per cent in 2012 – a slightly firmer profile than had been anticipated in the October MPR. With a little more excess supply in the near term, the Bank continues to expect that the economy will return to full capacity by the end of 2012.

Underlying pressures affecting prices remain subdued, reflecting the considerable slack in the Canadian economy. Core inflation is projected to edge gradually up to 2 per cent by the end of 2012, as excess supply in the economy is slowly absorbed. Inflation expectations remain well-anchored.  Total CPI inflation is being boosted temporarily by the effects of provincial indirect taxes, but is expected to converge to the 2 per cent target by the end of 2012.

Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. This leaves considerable monetary stimulus in place, consistent with achieving the 2 per cent inflation target in an environment of significant excess supply in Canada. Any further reduction in monetary policy stimulus would need to be carefully considered.

OTTAWA: Finance Minister Jim Flaherty has announced new mortgage regulations aimed at reducing Canadians' soaring household debt.

Flaherty has unveiled three new rules:

• Mortgage amortization periods will be reduced to 30 years from 35 years.
• The maximum amount Canadians can borrow to refinance their mortgages will be lowered to 85 per cent from 90 per cent.
• The government will withdraw its insurance backing on lines of credit secured on homes, such as home equity lines of credit.

The rules are aimed at encouraging responsible lending and borrowing and encouraging people to increase their home equity.

``Our measures will help improve the financial situation of households in Canada,'' Flaherty said.

``While interest rates are currently low by historical standards, eventually they will rise. Canadians should, and for the most part do, understand this when taking on significant debt such as the purchase of a new home.''

The minister said the measures are aimed at protecting ``the stability of the economy by ensuring lenders' practices are sustainable.'' He said that will increase the security and stability of home ownership.

``This will also increase the savings of Canadian families, savings of tens of thousands of dollars over the life of a mortgage, savings that go back in the pockets of hardworking families, where they belong.''

The new rules come on the heels of a Bank of Canada announcement that Canadians' domestic debt burdens have hit record levels.

The ratio of household debt to disposable income has reached 147 per cent and household debt has reached $1.4 trillion.

The International Monetary Fund has called household debt the No. 1 risk to the Canadian economy.

OTTAWA: The moment of decision over interest rates is drawing closer for the Bank of Canada's enigmatic governor Mark Carney.

After sitting on the sidelines the past two monetary policy meetings, pressure is starting to build over when to again apply the interest rate brake.

A few days ago, the C.D. Howe monetary policy council, a panel of hand-picked economists from the private sector and academia, told the governor the time has already come and he should hike the trendsetting rate 25 basis points to 1.25 per cent on Tuesday.

By the end of the year, the consensus of the panel says the policy rate should be lifted to 2.5 per cent, from the current one per cent.

One of those casting the pivotal ``yeah'' in the five-four split decision calling for rate escalation to begin this week was its newest member, Sheryl King, chief economist with Bank of America Merrill Lynch.

``Policy rates are extremely low right now and probably too accommodative for the amount of growth we are going to see over the next 12 months or so,'' she said. ``The economy is starting re-accelerate, (and) we are starting to see signs of pretty sustained U.S. economic activity.''

Like Carney and the federal government, she is also worried low rates for too long a period are too tempting given that Canadians have already piled on debt at record levels.

In recent public statements, however, Bank of Canada officials have made it clear the central bank is not the go-to body to deal with excessive debt. First and foremost are the borrowers and the banks, said deputy governor Agathe Cote earlier this month, then the federal government.

For his part, Finance Minister Jim Flaherty continues to hint he wants the banks to rein in home-equity loans and to suggest he is prepared to do it if lenders won't.

``The government remains concerned in the level of household debt and will look at taking prudent steps to moderate that growth,'' Prime Minister Stephen Harper said Friday.

In his October announcement, Carney gave all the impression of a governor planning to stay on the sidelines for a long time following three successive hikes during the summer, while everyone else in the G7 stood pat.

``The economic outlook for Canada has changed,'' he declared in an accompanying statement, ratcheting down expectations for growth this year from a relatively rosy 2.9 per cent to a decidedly pasty 2.3 per cent.

The statement Tuesday might very well begin the same way, with the opposite tilt.

Since October, the U.S. Federal Reserve put an additional US$600 billion of stimulus on the economy's table, and President Barack Obama did one better by not only extending Bush-era tax cuts, but boosting other entitlements.

That has made all the difference in the outlook for both the U.S. and Canadian economies, said Bank of Montreal economist Douglas Porter, who believes Carney will adjust the growth forecast again Tuesday to somewhere between 2.3 and 2.9 per cent.

Washington's actions have likely added between half and one percentage points to the U.S. growth potential and that should help boost Canadian exports and prices for commodities such as oil.

``There has been a big improvement in the U.S. outlook,'' Porter said. He points out that even with the U.S. consumer supposedly tapped out, retail sales rose again in December and are up almost eight per cent from a year ago.

Porter and other analysts think that has made it more likely Carney will move quicker on interest rates, from mid-summer, the consensus view a couple of months ago, to as early as March 1.

Some, however, are not convinced.

While Carney may take advantage of improved conditions and strike a ``hawkish'' tone on interest rates, there are still enough headwinds to stay his hand, says David Tulk, senior strategist with TD Securities.

The key problem, he says, is that the U.S. economy is still being propped up by the government and the private sector has yet to show it can take over.

``The Bank of Canada is still more likely to consider hikes in an environment where private sector participation is more assured,'' he said, not where the hand-off from public-to-private resources is still theoretical.

As well, raising interest rates in Canada while the U.S. remains at virtual zero will only strengthen the loonie, adding one more millstone on the back of the struggling manufacturing sector.

Finally, there's the sticky problem that even if he felt it advisable to hike rates Tuesday, Carney has not prepared the markets for such a eventuality.

The opposite is in fact true. The last time the governor spoke on the issue, he made it clear he was concerned about getting too far ahead of the U.S. Fed.

``I don't think it's a close call for Carney at all (Tuesday),'' said Porter. ``The market has factored in a one per cent chance of a rate hike.''

Even King, who favours an interest rate boost, said she doubts Carney will move Tuesday.

But she says the discussion has now tilted decidedly toward interest rate increases sooner than later. Unless something dramatically negative occurs, King says Canadians, especially those who have taken on a lot of debt, should brace themselves for higher interest rates going forward.