PBOC Enhances Short-Term Rate Control and Adds Varieties in Due Course: What Is the Deeper Intent?

On June 17, PBOC Governor Pan Gongsheng proposed two measures to improve the short-term interest rate control mechanism at the 2026 Lujiazui Forum: narrowing the operating interest rate range of the temporary overnight repo/reverse repo from the previous 70 basis points to a symmetric 50 basis points; and adding the public market overnight reverse repo operation variety in due course.

According to the PBOC announcement on the same day, the central bank has decided to optimize the operational elements of open market temporary overnight repo/reverse repo operations with immediate effect. The operating time has been adjusted to 15:00-15:30 on working days. The operating interest rates have been adjusted to 25 basis points below and 25 basis points above the 7-day reverse repo operating interest rate in the open market, respectively. After this adjustment, based on the current policy interest rate, the upper and lower limits of the overnight repo/reverse repo operating interest rates are 1.65% and 1.15%, respectively.

"The two measures help to improve the short-term interest rate control mechanism, continue to promote the transformation of the monetary policy framework toward a price-based model, and enhance the transmission from policy interest rates to market interest rates," industry insiders summarized. Narrowing the operating interest rate range of the temporary overnight repo/reverse repo and improving the use mechanism is conducive to better playing the role of the policy interest rate pricing anchor. Adding overnight reverse repo operation varieties in due course is also conducive to enhancing the precision and effectiveness of short-term interest rate control.

On the one hand, since its launch in July 2024, the temporary overnight repo/reverse repo operation has played a role similar to an interest rate corridor. Narrowing the operating interest rate range will improve the precision and effectiveness of the monetary policy price-based control tool and release a clearer policy interest rate signal to the market.

In recent years, compared with the traditional interest rate corridor with the Standing Lending Facility (SLF) interest rate as the upper corridor and the excess reserve interest rate as the lower corridor, the central bank has, by setting the operating interest rate range of the temporary overnight repo/reverse repo, in effect defined a narrower "soft corridor" for market interest rates, effectively constraining the volatility of short-term market interest rates.

Since the launch of the temporary overnight repo/reverse repo tool, the overnight interest rate in the money market (DR001) has always remained within the temporary repo interest rate range, and operations have become more stable. This year, DR001 has basically operated within the range of 20 basis points above and below the policy interest rate. The central bank's move to narrow the temporary repo interest rate range also reflects the general principle of seeking progress while maintaining stability. In addition, the central bank has also appropriately moved up the operation time of the temporary overnight repo/reverse repo and disclosed the trigger conditions for the tool, namely that DR001 continues to be below or above the corresponding operating interest rate of the temporary repo, which can better stabilize market expectations.

Internationally, other major central banks have, in the process of improving their monetary policy frameworks, also enhanced their control over short-term interest rates by narrowing the interest rate corridor. Previously, the upper and lower limits of the central bank's temporary overnight repo/reverse repo operating interest rates were +50bp and -20bp, respectively, and the tolerance for short-term interest rate fluctuations was relatively large. Therefore, narrowing the operating interest rate range of the temporary overnight repo/reverse repo is conducive to better playing the role of the policy interest rate pricing anchor.

On the other hand, the temporary overnight repo/reverse repo is also a daytime liquidity management tool, which can absorb market liquidity through repo or inject market liquidity through reverse repo, thereby smoothing liquidity fluctuations. The central bank's announcement to add overnight reverse repo varieties in due course not only meets market demand, but also helps enhance the precision and effectiveness of short-term interest rate control.

The main open market operation variety of China's central bank is the 7-day reverse repo, which is similar to that of the European Central Bank and the Bank of England. It can better balance the precision of operations and the pressure of maturity rollover, and has played the role of a market pricing anchor over the years of practice, effectively maintaining the stability of short-term interest rates.

By contrast, the overnight repo/reverse repo operation has a shorter term. At time points such as the end of the month, the temporary liquidity demand of financial institutions increases, and the flexibility of overnight operations is stronger, which can better achieve the goal of "smoothing peaks and filling valleys" in liquidity.