By David Barwick – VIENNA (Econostream) – The size of the European Central Bank’s interest-rate corridor could serve as a policy instrument to limit uneven monetary policy transmission across the Eurozone, Austrian central bank Governor Martin Kocher said Thursday.

“[N]arrowing the ECB’s interest rate corridor appears to be highly effective in containing heterogeneous pass-through at the short end of the yield curve,” Kocher said in opening remarks at an OeNB-SUERF conference in Vienna.

“Hence the size of the rate corridor can be a potential policy instrument,” he said, citing recent research.

Kocher said uneven transmission remained a key challenge because it could produce differing effects across countries, regions, sectors and economic agents. In severe cases, differences in financing conditions not justified by fundamentals could develop into fragmentation and threaten the singleness of monetary policy, he said.

However, the ECB was well equipped to address unwarranted fragmentation through its Transmission Protection Instrument and Outright Monetary Transactions, Kocher said.

More granular and higher-frequency data were also helping policymakers better understand the causes of uneven transmission, he said. Research showed that only half the variation in the pass-through of interest rates to companies’ external financing premiums reflected country-level factors, such as sovereign risk premiums, while the remainder arose from differences among banks and companies.

Kocher argued that structural differences across Eurozone economies were not inherently a weakness and should be assessed against the alternative of a Europe divided among separate monetary policies rather than against a hypothetical, fully homogeneous currency union.

He also said the ECB Governing Council needed greater diversity, “most urgently with respect to gender,” to reduce the risks of groupthink, herding and polarization.

Completing the banking union and establishing a savings and investments union remained unfinished business, Kocher said, reiterating the Governing Council’s support for the European Commission’s plans.