The PBOC’s addition of overnight OMO is a modernization of the monetary policy framework, not equivalent to a rate-cut signal

Overview

This report discusses the implications of the People’s Bank of China announcing new overnight reverse repo open market operations on June 29-30. Nomura believes this move is an important step for the central bank to improve its short-end rate management tools and enhance the efficiency of monetary policy transmission. In particular, against the backdrop that overnight tenors have long accounted for the bulk of trading volume in the interbank repo market and DR001/R001 have become the de facto anchor for short-end funding costs, the addition of overnight OMO helps ease the mismatch between the tenor of policy tools and the market’s dominant tenor.

Core views

The report’s core views are: first, the launch of overnight OMO is part of the modernization of the monetary policy framework and the improvement of operational tools, and should not be simply interpreted as a rate cut or a signal of broad-based easing; second, the PBOC’s adjustment of temporary overnight tool rates to 25bp above and below the 7-day OMO rate makes the interest rate corridor narrower and more symmetric, providing a clearer policy signal; third, the initial operations are limited to the last two days of the second quarter, and whether it develops into a regular tool will be a key signal to watch regarding the direction of the PBOC’s policy framework reform; fourth, Nomura expects the overnight OMO rate to be around 1.30%-1.35% and maintains its forecast of no RRR cut and no rate cut this year.

Analysis framework

The report adopts a combination of policy event interpretation and money market spread analysis: it first reviews Governor Pan Gongsheng’s remarks at the Lujiazui Forum on June 17 regarding the interest rate corridor and temporary overnight tools, then combines DR001, DR007, and the trading structure of the interbank repo market to assess the institutional significance and possible rate level of launching overnight OMO, and compares it with frameworks such as those of the Federal Reserve, the European Central Bank, and the Bank of Japan, which use overnight rates as anchors for policy transmission.

Methodology notes

• Monetary Policy FrameworkInterest Rate Corridor Mechanism

  Constrain fluctuations in short-end market rates through upper and lower policy operating rates.

  The PBOC adjusted the temporary overnight repo and reverse repo rates to 25bp above and below the 7-day OMO rate, narrower and more symmetric than the previous upper bound of 50bp and lower bound of 20bp, which helps improve policy signaling and funding rate stability.

• Money Market PricingDR007-DR001 Term Spread

  Infer the pricing range of overnight OMO by using the spread between 7-day and overnight repo rates.

  The report notes that the average spread between DR007 and DR001 was about 12bp over the past 12 months and about 8bp over the past 3 months, and therefore expects the overnight OMO rate to be below the 7-day OMO rate of 1.40%, in the 1.30%-1.35% range.

• International ComparisonOvernight Policy Rate Anchor

  Major central banks usually communicate policy intent through overnight rates.

  The report compares China’s new overnight OMO with the Federal Reserve’s overnight federal funds rate, the ECB’s €STR, and the Bank of Japan’s uncollateralized overnight call rate, arguing that China’s policy framework is moving closer to the price-based policy management approach of major central banks.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• China money market rates

  Directly related

  Strengths

  Overnight OMO strengthens the policy anchoring of short-end funding rates such as DR001 and may improve rate transmission and intraday volatility management.

  Weaknesses

  It is initially limited to the last two days of the second quarter, and the degree of regularization has not yet been confirmed.

  Comparison

  Compared with relying only on 7-day OMO, overnight OMO is closer to the dominant trading tenor in the interbank repo market.

  Risks

  If the market misreads the lower overnight OMO rate as broad-based easing, it may lead to biased expectations for the subsequent rate-cut path.

• China fixed income market

  Indirectly related

  Strengths

  A clearer short-end rate corridor helps stabilize liquidity expectations and improve pricing at the short end of the yield curve.

  Weaknesses

  The report maintains its forecast of no RRR cut and no rate cut, implying limited directional easing catalysts for the bond market.

  Comparison

  This framework is closer to the approach used by the Federal Reserve, the European Central Bank, and the Bank of Japan in transmitting policy intent through overnight rates.

  Risks

  Global oil prices, the policy paths of major central banks, and domestic liquidity volatility may alter expectations for policy at year-end.

Key data

• Timing of the new overnight OMO2026-06-29 to 2026-06-30The PBOC announced that it would conduct overnight reverse repo operations through a 'fixed-rate, quantity-based tender' method.
• Current 7-day OMO rate1.40%The report uses this as the benchmark for comparing the overnight OMO rate.
• Nomura’s expected overnight OMO rate1.30%-1.35%Inferred based on the term spread between DR007 and DR001.
• Average DR007-DR001 spread over the past 12 monthsAbout 12bpUsed in the report to support the judgment that the overnight OMO rate will be lower than the 7-day OMO rate.
• Average DR007-DR001 spread over the past 3 monthsAbout 8bpShows that the recent spread between overnight and 7-day funding rates has been relatively narrow.
• Temporary overnight tool rate corridor25bp above and below the 7-day OMO rateAdjusted from the previous upper bound of 50bp and lower bound of 20bp to a more symmetric corridor.
• Operating window for temporary overnight tools15:00-15:30Moved forward from the previous 16:00-16:20 to give institutions more time for position matching and adjustment.

Impact & implications

For the market, overnight OMO helps strengthen the PBOC’s direct guidance over short-end funding rates, reduce interbank liquidity volatility around quarter-end and similar periods, and better align policy operating tools with the market’s dominant trading tenor. For policy interpretation, a lower overnight OMO rate does not necessarily represent a policy rate cut, because its tenor is shorter and should be understood together with the spread between DR001 and DR007; what truly needs to be observed is whether this tool evolves from a temporary quarter-end stabilization tool into a regular operating mechanism.

Risks

• If overnight OMO is not regularized, market expectations for the pace of monetary policy framework reform may decline.
• Quarter-end regulatory assessments and funding demand may continue to cause short-term volatility in interbank liquidity conditions.
• If global oil prices continue to fall and ease the pressure on major central banks to raise rates, the probability of a moderate rate cut by the PBOC before year-end may rise, changing the current baseline judgment of no rate cut.
• The market may misinterpret an OMO rate for a shorter tenor being lower than the 7-day OMO rate as a policy rate cut.

What to watch

• The actual rate level and injection size of the overnight reverse repo operations on June 29-30.
• Whether the PBOC continues to conduct overnight OMO regularly after quarter-end.
• Whether DR001 continues to deviate from the corresponding operating rate, and how frequently the PBOC triggers temporary overnight tools.
• Changes in the DR007-DR001 spread, especially whether the overnight OMO rate remains stable in the 1.30%-1.35% range.
• The impact of global oil prices and policy pressure from major central banks on China’s monetary policy room at year-end.