The recent tightening of monetary policy has yet to revive transmission or fragmentation concerns

For the first ten years of its existence, the euro area was characterised by broadly comparable sovereign yields between Member States. However, the global financial crisis and the European sovereign debt crisis led to differences in these yields, particularly for peripheral countries, which to some extent can still be seen today.

Against the backdrop of the most significant series of rate hikes in the history of the monetary union, this article takes a closer look at various indicators used to detect and measure the resurgence of transmission and fragmentation issues. It analyses transmission and fragmentation in both the upstream (money and sovereign bond markets) and downstream (corporate bond and retail banking markets) segments of the monetary policy transmission chain.

These indicators show that the recent tightening of monetary policy has not, for the time being, revived transmission or fragmentation concerns on a large scale. Only sight deposit rates have shown some resistance to the ECB’s policy rate hikes, as commercial banks have been rebuilding their interest margins.

While the resilience of monetary policy transmission probably reflects efforts made in recent years at various political levels, now is no time for complacency. For one thing, the ECB’s tightening phase is not over yet. On the other hand, while a return to the virtually non-existent fragmentation seen in the early years of the monetary union may not be desirable, sovereign spreads between Member States are sometimes considerable. A more uniform and sustainable fiscal policy in the euro area could, along with other measures, help to limit fragmentation issues.