Meanwhile, the EU will end 2006 with a rate of 3.50%, and 4.00% in 2007. In this fashion, and assuming that the upward cycle in the United States ends, the 10-year rates would orbit between 5.1% and 5.2%, but keeping an upward bias in the event of unexpected movements in growth or inflation. For the Eurozone, the baseline forecast leaves these rates between 4.2% and 4.3%, so that the U.S. dollar will not be as favoured as in prior months. In addition, the growing consensus about the need for a more depreciated dollar, leads us to envision an American currency moving in the 1.25-1.30 range with the Euro.

However, there is still concern about the imbalances characterizing this expansionary cycle. In fact, although the world economy could live with these imbalances (large deficit on current account in the US, oil prices), there is growing consensus about the need for an adjustment in the medium term. In spite of everything and given the adjustment of some financial variables, optimism persists and the geographical redistribution of world growth makes the dynamism observed until today less vulnerable.

Europe: growth accelerates

The good performance of the economy in the euro zone has been consolidated in the last three months. After growing at a rate of 2.0% in the first quarter of the year, everything suggests that growth will speed up again in the second quarter, foreseeably towards rates of around 2.3%-2.4%. Unlike what is happening in the U.S., where there are increasing doubts about the possibility of sustaining such a strong growth rate, in Europe not only is activity accelerating, but the underlying dynamics are favourable for expecting it to continue in 2006 and 2007. Thus, the buoyancy of world trade is expected to continue to support European exports. Capital Investment will still be supported by large corporate profits and companies' high liquidity. The increase in lending to non-financial companies, which is growing at double-digit rates, illustrates companies' willingness to invest, with funds increasingly going to capital goods purchases and not to restructuring debt or financing mergers and acquisitions, as it did in previous years. There are also signs of reactivation in private consumption, the component that has been lagging behind the most in the recovery. The labour market has been improving across Europe, suggesting that private consumption will speed up over and above the one-off effects stemming from the World Cup and the anticipation effect of the increase in VAT in Germany. All in all, the EMU is expected to grow at 2.3% in 2006, the highest rate since 2000, and at 2.2% in 2007.

Undoubtedly, the risk factors stemming from higher oil prices or from an adjustment in world growth (largely with respect to the USA or China), bias the risk balance towards slower growth. But as the EMU increasingly bases expansion on domestic demand, the impact should be smaller. In any event, these are risk scenarios to which a low probability is assigned.

Although there are no alarming upward risks, inflation is not likely to fall below 2% in the next two years. In June, it overshot the ECB's target for the twelfth month in succession, driven by the energy component.

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