China Sets 1.25% Overnight Reverse Repo Rate Below Market Expectations

China’s central bank has introduced its new overnight reverse repo operation, setting the interest rate at 1.25%, according to a Reuters report citing people familiar with the matter. The move marks another step in the People’s Bank of China’s (PBOC) ongoing efforts to modernize its monetary policy framework and improve short-term liquidity management in the financial system.

The newly announced overnight reverse repo rate is 15 basis points lower than the current seven-day reverse repo rate of 1.4%, which remains China’s primary benchmark policy rate. By establishing a separate overnight rate, the PBOC aims to strengthen its ability to guide short-term funding costs and enhance the efficiency of interbank lending.

The decision surprised financial markets, as analysts and traders had widely expected the overnight reverse repo rate to be set between 1.30% and 1.35%. Instead, the lower-than-anticipated 1.25% rate signaled a more accommodative stance toward short-term liquidity conditions.

The launch of the overnight reverse repo facility represents a significant development in China’s broader monetary policy reforms. Reverse repo operations are widely used by central banks to inject liquidity into the banking system by purchasing securities with an agreement to sell them back at a later date. By adding an overnight tool alongside its existing seven-day operation, the PBOC gains greater flexibility in managing daily cash conditions and stabilizing money market rates.

Market participants will closely monitor how the new overnight reverse repo operation interacts with the existing seven-day policy rate and whether it influences future monetary policy decisions. The introduction of the facility also reflects China’s continued efforts to refine its interest rate framework, improve financial market transmission mechanisms, and support stable economic growth amid evolving domestic and global economic conditions.

The latest move underscores the PBOC’s commitment to enhancing liquidity management while providing policymakers with an additional instrument to guide short-term borrowing costs in the banking sector.