Bank stocks rallied with the market Wednesday on favorable inflation news.

Labor Department figures on consumer prices and capacity utilization released early in the day confirmed the conventional wisdom that the economy had slowed, and sparked a broad-based rally in bonds and stocks.

The 30-year Treasury issue, as of 2 P.M., had a yield of 7.57%, the lowest since early August. The Dow rose 27.92 points to 3,986.17, closing at a record high.

Wednesday's bank rally, which followed a O.55% increase in the American Banker index Tuesday, lifted nearly all boats among the top 50 banks in market capitalization. Only nine companies in that group declined for the day.

Among the gainers were First Bank System, which rose $1 to $38.50. The Minneapolis bank announced it would repurchase 14 million shares, which along with an earlier two-million-share buyback, represents 11.9% of the company's stock.

Investors believe the Federal Reserve may be done hiking interest rates, which is seen as a positive for banks because it would halt the contraction of banks' net interest margins.

"Clearly these numbers are indicating not an overwhelming amount of inflation in the system," said Scott Edgar, an analyst with SIFE Trust Fund, which invests in banks and thrift stocks.

"This lessens pressure on the Fed," he added. "If that is the case, then banks are the stocks you want to be in for the remainder of the year."

The Consumer Price Index rose 0.3% in January - exactly in line with market expectations. And capacity utilization only nudged up one-tenth of 1% last month.

"If people get the sense rates have hit a ceiling, banks may increase another 10% to 15% this year," said Michael Plodwick of C.J. Lawrence, a unit of Deutsche Bank.

Since Jan. 1, the Keefe, Bruyette & Woods Inc. index of bank stocks is up roughly 10.5%, while the S&P 500 is up only 5%.

Among the stocks that are on the rise are those that were hardest hit during the last quarter's downturn, said Dennis Shea of Morgan Stanley & Co. Banc One Corp., PNC Bank Corp, and Mellon Bank Corp. all have moved higher off recent lows, he said.

"I don't see anything causing a setback for bank stocks in the immediate future," added Kenneth Ackbarali, senior economist with First Interstate Bancorp. "The rally should be sustained."

In other news, Boston Bancorp rose $1.50 to $35.25 Wednesday, and has risen 22% since Monday, two weeks after the bank's top two executives resigned. (See related story on page 15.)

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