European Central Bank Signals Expansion of SMP

The European Central Bank (ECB) signaled that it would expand its SMP (Securities Markets Programme) to include the bonds of Spain and Italy.  The ECB said in a statement that it "welcomes the announcements made by the governments of Italy and Spain concerning new measures and reforms in the areas of fiscal and structural policies.  The Governing Council considers a decisive and swift implementation by both governments as essential in order to substantially enhance the competitiveness and flexibility of their economies, and to rapidly reduce public deficits." The Bank then said: "the ECB will actively implement its Securities Markets Programme." in effect acknowledging that the two countries had met the criteria for support by committing to fiscal reform.

On the SMP the ECB said: "This programme has been designed to help restoring a better transmission of our monetary policy decisions – taking account of dysfunctional market segments – and therefore to ensure price stability in the euro area."  The ECB also said that it "considers fundamental that governments stand ready to activate the European Financial Stability Facility (EFSF) in the secondary market, on the basis of an ECB analysis recognising the existence of exceptional financial market circumstances and risks to financial stability, once the EFSF is operational."  The SMP and EFSF mechanisms are designed to get the Euro through the crisis so that fiscal reform can take place in a more orderly fashion.

The ECB last increased its interest rates by 25 basis points at its July meeting; pausing in May and June, after raising the rate by 25 basis points to 1.25% in April this year.  The ECB held the rate unchanged when it met last week, and also announced a resumption of its bond buying program; which initially had been focused on Greece, Portugal, and Ireland.  The Euro Area reported annual HICP inflation of 2.7% in June (same as May), compared to 2.8% in April, and 2.7% in March, and above the Bank's inflation target of maintaining inflation below, but close to, 2% over the medium term.  The Euro Area reported quarterly GDP growth in the March quarter of 0.8%, following a 0.3% increase in the December quarter of 2010.

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