The People's Bank of China (PBOC) is studying a shift to overnight market operations that would align its main tool's maturity with its overnight target and make interest-rate adjustments more precise.
PBOC Governor Pan Gongsheng said Oct. 19 that the bank would examine moving the bulk of its open-market operations from seven-day to overnight transactions when appropriate. If it makes that change, the rate on those overnight operations would become its main policy rate. Pan announced no decision.
The proposal addresses a mismatch in the current framework. Pan said the seven-day reverse repo rate is the policy rate, while DR001, an overnight rate in the interbank repo market, has become the bank's effective target. Moving the main operations to an overnight maturity would bring their timing into line with that target. The rate on PBOC operations and the DR001 market rate are distinct measures.
The PBOC conducted 80 billion yuan in seven-day reverse repos at 1.40% on Oct. 19, its open-market operations notice showed. The figure is the rate on that seven-day operation, not the overnight interbank rate.
FXStreet reported Oct. 20 that Commerzbank analyst Volkmar Baur cited a 1.25% overnight rate in his assessment of the proposal. Baur said bond markets had anticipated a lower policy rate; his assessment did not establish that they had priced in exactly 1.25%. Pan did not announce 1.25% as a future policy rate.
Baur sees PBOC guidance as a stronger influence on the yuan than interest-rate differences, FXStreet reported. He still expects the currency to strengthen gradually.
Pan described the possible change as part of a gradual adjustment to the PBOC's monetary framework. He said the bank had established the seven-day reverse repo rate as its policy rate and added overnight operations over the preceding two years. The PBOC will study whether to make overnight operations predominant; Pan gave no timetable.
