European Central Bank
European Central Bank is right to keep interest rates low (Reuters)

A senior figure within the European Central Bank claims the introduction of the Outright Monetary Transaction programme has played a key role in preventing the financial fragmentation of the eurozone.

Benoit Cœuré, who is a member of the ECB's executive board, defended the policy during a speech in Geneva.

"The OMT programme has successfully contributed to the normalisation of Europe's financial market and largely restored the attractiveness of a broader set of saving opportunities," Cœuré said.

"Thanks to the introduction of the OMT, the strong divergence in funding costs across countries has been to some extent reduced."

Cœuré also praised other unconventional measures taken by the ECB to cushion the effects of Europe's sovereign debt crisis, including low interest rates and "the unlimited provision of liquidity to banks".

Justifying Low Interest Rates

The argument that permanently low interest rates penalise savers was taken on directly by Cœuré, who claimed that such rates were "the necessary response to bring the economy back on to a sustainable growth path in an environment of price stability."

Although Cœuré acknowledged low interest rates could harm savers, he said that high interest rates in the context of a recession would harm savers in the long run, and could strangle economic growth.

"Far from helping savers, higher monetary policy interest rates would only have depressed the economy further, delayed the recovery and contributed to downside risks to price stability."

No Evidence of Inflation

The idea that ECB interest rates were too low and could stoke inflation in the eurozone was criticised by Cœuré, who said: "The latest ECB Staff macroeconomic projections for the euro area foresee a rate of annual inflation in 2014 of only 1.3%, down from 1.5% in 2013 - both rates somewhat below our own definition of price stability, which is below, but close to, 2%.

"Inflation projections therefore do not support the hypothesis that ECB policy interest rates are excessively low."

Due to a threat of deflation rather than inflation in the eurozone, he argued that the ECB'S 0.5% interest rate should continue.

"If anything, our staff estimates that real output in the euro area will contract by 0.4% in 2013, and return to a timid 1% growth in 2014, justifying an easing bias to future monetary policy decisions."