Key facts
- China's central bank is considering shifting its main policy rate to the overnight reverse repurchase rate.
- The change aims to improve the transmission of monetary policy and support the economy.
- The overnight repo rate would replace the seven-day reverse repo rate as the benchmark.
- Governor Pan Gongsheng stated the overnight repo rate has become the effective target rate for monetary policy.
- New measures will expand access to the Standing Lending Facility and create a liquidity tool for non-bank institutions.
China's central bank is contemplating a shift in its primary monetary policy tool, moving from the seven-day reverse repurchase rate to the overnight reverse repurchase rate. The People's Bank of China (PBOC) believes this change will enhance its control over short-term interest rates and improve the effectiveness of monetary policy transmission to the broader economy. Governor Pan Gongsheng indicated that the overnight repo rate has already effectively become the target rate due to its sensitivity to liquidity conditions and recent stability. This adjustment aligns China's policy framework more closely with global central banks like the US Federal Reserve, which utilize overnight rates to anchor yield curves. In addition to the rate shift, the PBOC plans to broaden access to its Standing Lending Facility and introduce a new liquidity support mechanism for non-bank financial entities such as insurers and fund managers.