China’s central bank shifts main policy rate to overnight reverse repo

China’s central bank shifted its main policy rate from the seven-day reverse repo rate to the overnight reverse repo rate on Monday, conducting 541 billion yuan ($80.6 billion) in overnight operations at an interest rate of 1.25 per cent.

The People’s Bank of China (PBOC) said the operations mark the first implementation of a revised mechanism announced late last month, under which overnight reverse repos will be conducted every working day and become its main open market instrument.

Other policy tools previously linked to the seven-day rate, including temporary repo and reverse repo operations, will now be linked to the overnight rate, with existing spreads unchanged.

The adjustment aims to strengthen price-based monetary policy regulation and improve the transmission of policy signals to the real economy, analysts said.

PBOC Governor Pan Gongsheng said in October that shifting the main open market operations to an overnight tenor would improve the precision of interest rate regulation.

Analysts said the change would provide a clearer market benchmark, reduce interest rate fluctuations and shorten the transmission chain from policy rates to money market rates, bond yields and lending costs.

They also said daily overnight operations would help limit disruptions to policy rate signals during tax payment periods and at month-ends.