China's central bank steps up shift toward overnight rate as policy anchor

​China's central bank said on Friday it would ​conduct overnight reverse repo operations every working ‌day ​starting next Monday, in a step towards making the rate its main policy anchor.

The People's Bank of China will carry out the overnight operations through a ‌fixed-rate, quantity-based tender on each business day, with the operating rate currently at 1.25%, it said in a statement. The central bank, which flagged the shift earlier this month, said the move was aimed at further improving its management of short-term ‌interest rates.

"What occurred today is arguably the clearest signal yet that the PBOC is moving toward an overnight-rate-based ‌operating system similar to those employed by major central banks including the Federal Reserve, the European Central Bank and the Bank of Japan," said Zhou Hao, chief economist at Guotai Junan International. PBOC Governor Pan Gongsheng said earlier this month at a financial forum that the central ⁠bank was ​studying switching its main policy rate ⁠to the overnight reverse repo rate.

The overnight operation rate of 1.25%, disclosed by the PBOC for the first time, is broadly ⁠in line with market expectations and reported borrowing cost, and sits below the 7-day reverse repo rate of 1.4%. In Friday's statement, the ​PBOC said its seven-day reverse repo operations would shift to a fixed-quantity, interest-rate tender with multiple winning bid ⁠rates, and would be conducted mainly around tax payment periods and month-ends.

Ming Ming, chief economist at Citic Securities, said the reform of the ⁠short-end ​mechanism laid the groundwork for diversifying the pricing benchmarks for loan rates and for the transmission of broad-based declines in interest rates. Other tools that were previously priced at a spread above or below the seven-day reverse ⁠repo rate - including temporary repo and reverse repo operations and repo facilities for overseas central bank-type institutions - will instead be ⁠priced at a spread to ⁠the overnight reverse repo rate, with the size of the spreads left unchanged, the PBOC said.

Overnight reverse repo operations debuted in late June as the latest addition to ‌the PBOC's toolkit.