China: PBoC overnight tool refines framework – MUFG

MUFG’s Michael Wan points to the People’s Bank of China’s new overnight liquidity tool, implicitly set at 1.25%, as a step in refining China’s interest rate framework. He argues that the 7‑day reverse repo rate remains the main policy instrument for now, with the overnight rate used for fine‑tuning, and expects a gradual shift toward the overnight rate as the medium‑term policy anchor.

Overnight rate seen as future anchor

"The other key focus of markets in our region was the implicit rate setting of PBOC’s new overnight liquidity tool."

"This came in at 1.25% according to news reports, although the coupon rate was not explicitly announced by the central bank, with PBOC only saying that it conducted 300 billion yuan (US$44bn) of overnight reverse repurchase agreements in OMOs yesterday."

"While this follow PBOC Governor Pan Gongsheng’s remarks at the recent Lujiazui Forum on further refining China’s interest rate framework, we still think the 7-day reverse repo rate remains the primary tool for now with the overnight rate serving as a supplementary liquidity fine-tuning instrument."

"Over the medium-term, the PBOC will likely shift towards the overnight rate as the policy anchor but this will take some time."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)