For four months, Chinese banks have been borrowing from the central bank at an overnight rate it declined to publish. That ended on Friday. The rate on the central bank's overnight reverse repurchase operations is 1.25%, and the instrument will be auctioned every working day at a fixed rate, the People's Bank of China said in a notice. The seven-day operation will shift to a fixed-quantity, rate-bid format used mainly around tax dates and month-end, while other tools once priced off the seven-day rate will be re-based on the overnight rate with their spreads unchanged. The new rate sits under the 1.4% seven-day rate that has served as the benchmark, Bloomberg News reported. It also matches the level at which the first overnight operation was conducted in June.
The change is the latest step in a years-long effort to make China's monetary policy work more like that of Western central banks, which guide the price of money rather than its quantity. Moving to an overnight tenor brings the anchor closer to the rates at which banks actually trade with one another each day.
How much of this is plumbing and how much is easing is the question traders are weighing. Market participants told Caixin that the stated purpose is to refine control of short-term rates and push policy further toward price-based management, while a lower center for interest rates is the practical outcome, Caixin reported. Caixin framed the switch as the overnight operation formally taking over from the seven-day reverse repo as the central bank's main policy rate.