According to the minutes of the meeting, a 25 - basis point increase in the bank
rate was fully factored in by the markets in the run - up to November's MPC meeting, and the
interest -
rate curve underlying the November Inflation Report projected
interest rates at 1 percent by the end of the three - year
forecast period, higher than the recent
median estimates of economists polled by Reuters.
As usual, I don't place too much emphasis on this sort of
forecast, but to the extent that I make any comments at all about the outlook for 2006, the bottom line is this: 1) we can't rule out modest potential for stock appreciation, which would require the maintenance or expansion of already high price / peak earnings multiples; 2) we also should recognize an uncomfortably large potential for market losses, particularly given that the current bull market has now outlived the
median and average bull, yet at higher valuations than most bulls have achieved, a flat yield curve with rising
interest rate pressures, an extended period of internal divergence as measured by breadth and other market action, and complacency at best and excessive bullishness at worst, as measured by various sentiment indicators; 3) there is a moderate but still not compelling risk of an oncoming recession, which would become more of a factor if we observe a substantial widening of credit spreads and weakness in the ISM Purchasing Managers Index in the months ahead, and; 4) there remains substantial potential for U.S. dollar weakness coupled with «unexpectedly» persistent inflation pressures, particularly if we do observe economic weakness.