ECB to raise rates --  Growth still strong, inflation alarms
August 2, 2006

The European Central Bank (ECB) will probably raise their prime lending rate 1/4 point to 3%. Unlike the U.S. Federal Reserve, the ECB is more concerned about inflation, which has been at 2.5%, than a slowdown in economic growth. GDP growth was 2% for the first quarter of 2006, while estimates for second quarter growth are slightly higher at 2.1%. Overall 2006 growth will remain steady at 2%.

What it Means:
The Euro area (Belgium, Germany, Greece, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal and Finland) has slower growth and lower inflation than the U.S., but the trend is stable.  Although the ECB lending rate of 3% is lower than the U.S. rate of 5.25%, it will continue to catch up. This will increase the value of the Euro, while the value of the dollar will probably level off. In fact, over the last week, the dollar has declined 2% against the euro, possibly in anticipation of the decisions of both Central Banks.

Action Steps:
Talk with your financial planner to be sure you have a good allocation of European mutual funds. This will protect you from both a slowdown in the U.S. portion of your portfolio, and a decline in the dollar.

Source: European Central Bank web site, Eurostats web site, “Eurozone Economic Outlook”, Association of Three Leading European Economic Institutes, July 12, 2006.