In 2024, the People’s Bank of China (PBoC) implemented significant reforms to its monetary policy framework to enhance the effectiveness of its policy transmission and better support economic growth.
Shift to the 7-Day Reverse Repo Rate as the Main Policy Rate:
Traditionally, the PBoC utilized multiple policy rates, including the Medium-term Lending Facility (MLF) and Loan Prime Rate (LPR) rates, to influence market liquidity and interest rates. In June 2024, Governor Pan Gongsheng announced a strategic shift, designating the 7-day reverse repurchase (repo) rate as the primary short-term policy rate. This move aimed to streamline the monetary policy framework and improve the transmission of policy signals to the broader economy.
The 7-day reverse repo rate is pivotal in the PBoC’s open market operations, where it provides short-term liquidity to commercial banks. By focusing on this rate, the PBoC seeks to exert more direct influence over short-term market interest rates, thereby enhancing the responsiveness of financial institutions to policy changes.
Adjustments to Policy Rates:
In line with this new framework, the PBoC made several rate adjustments:
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July 2024: The 7-day reverse repo rate was reduced by 10 basis points from 1.8% to 1.7%.
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September 2024: The rate was further lowered by 20 basis points to 1.5%, marking the lowest level on record since at least 2012.
These reductions were intended to lower borrowing costs and stimulate economic activity amid signs of economic slowdown.
Changes to the Loan Prime Rate (LPR) and MLF Setting Dates:
The PBoC also reformed the mechanisms for setting the Loan Prime Rate (LPR) and the Medium-term Lending Facility (MLF) rates to align with the new policy framework:
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Loan Prime Rate (LPR): Previously, the LPR was closely linked to the MLF rate. With the shift to the 7-day reverse repo rate as the main policy rate, the PBoC aimed to reform the LPR setting mechanism to better reflect market rates and improve the transmission of monetary policy.
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Medium-term Lending Facility (MLF): The PBoC adjusted the timing of its MLF operations, conducting them later than usual and providing liquidity through open market operations. This approach was part of the broader strategy to reduce the prominence of the MLF rate in favor of the 7-day reverse repo rate.
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In October 2024 the PBOC cut the one-year LPR to 3.1% and the five-year LPR to 3.6%.
This is the 1 year, graph is via Trading Economics:
Although I say these LPRs are less relevant, they still are. Most new and outstanding loans in China are based on the one-year LPR, while the five-year rate influences the pricing of mortgages.