(June 17): China’s central bank signalled a potential shift in its interest rate framework with a focus on the overnight policy rate, a move that would bring it more in line with global peers.
The People’s Bank of China (PBOC) will improve its adjustment of short-term interest rates and expand its suite of overnight reverse repurchase operations at an appropriate time, governor Pan Gongsheng said at the Lujiazui Forum in Shanghai.
The remarks add to signs that the PBOC may shift its main policy benchmark, which is currently the seven-day reverse repo rate. That rate has remained at 1.4% since May 2025.
Expectations for a shift to an overnight policy rate have grown in recent months as the PBOC has placed greater emphasis on the overnight interbank rate, which accounts for the bulk of cash transactions in China’s financial markets. Such a move would bring the PBOC closer to major central banks such as the Federal Reserve, which uses overnight rates as its main policy benchmarks.
The PBOC will improve the use of temporary overnight reverse repo and repo operations, setting the rates on those tools at 25 basis points above and below the seven-day reverse repo rate, Pan said. That will narrow the range in which market borrowing costs can move to 50 basis points from 70 basis points previously, according to Pan.
The remarks hint at another step in the PBOC’s revamp of its policy framework that began two years ago and was first signalled by Pan at the same forum. Under the reform, the PBOC sought to simplify a system that relied on multiple policy tools and instead centred policy signalling around a single key rate — the seven-day reverse repo rate — in order to guide markets more efficiently.
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At the same time, the central bank has gradually reduced the role of longer-tenor policy tools by adjusting bidding mechanism and scrapping a unified cost.
In July 2024, it announced plans to conduct temporary overnight repo and reverse repo to help guide market rates within a narrower range, though it has yet to carry out such operations.
The PBOC has indicated in recent months that it’s monitoring the overnight rate more closely. Since January, the central bank has included analysis in its monthly reports tracking the spread between the overnight repo rate in the interbank market and the seven-day policy rate.
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In its quarterly report released in May, the central bank pledged to “guide overnight interest rates to operate near policy interest rates,” a signal that authorities are paying closer attention to the overnight rates rather than the seven-day tenor.
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