People’s Bank of China
| Photo Credit:
JASON LEE

China’s central bank signalled a potential shift toward an overnight policy rate, a move that would bring it closer to global peers and give policymakers greater influence over short-term funding costs.

The People’s Bank of China will improve its adjustment of short-term interest rates and expand its suite of overnight reverse repurchase operations at an appropriate time, Governor Pan Gongsheng said at the Lujiazui Forum in Shanghai on Wednesday.

The remarks add to signs that the PBOC may eventually move away from the seven-day reverse repo rate as its main policy benchmark. Expectations for such a shift have grown in recent months as the central bank has placed greater emphasis on the overnight interbank rate, which accounts for the bulk of cash transactions in China’s financial markets. 

A shorter-term policy anchor may give the PBOC greater precision and flexibility in steering market conditions. Financial institutions borrow from one another daily to manage liquidity and settle transactions, making overnight rates much more heavily traded than other tenors. By exerting tighter control over those rates, the PBOC could improve the transmission of monetary policy through the financial system.

Such a move would bring the PBOC closer to major central banks such as the Federal Reserve, which uses overnight rates as its main policy benchmarks.

Pan added that the PBOC will improve the use of temporary overnight reverse repo and repo operations, setting their rates at 25 basis points above and below the seven-day reverse repo rate. That will narrow the interest-rate corridor to 50 basis points from 70 basis points previously, according to the governor, tightening the range within which market borrowing costs can fluctuate.

The moves are intended “to promote the transformation of the monetary policy framework to a price-based model, and to enhance the precision and effectiveness of the PBOC’s adjustment of short-term interest rates,” Pan said.

“PBOC will likely gradually move towards a new monetary policy corridor framework, with overnight repo rate being the likely new de facto policy rate,” said Becky Liu, head of China macro strategy at Standard Chartered Plc. “China’s interbank rates will likely to be even less volatile ahead.”

The Fed operates a similar framework, setting a target range for the federal funds rate at which banks charge to borrow from each other overnight. That range is currently at 3.50% to 3.75%, narrower than the new corridor announced by the PBOC.

A shift toward the overnight rate would mark another step in the PBOC’s revamp of its policy framework that began two years ago and was first signaled by Pan at the same forum. Under the reform, the central bank sought to simplify a system that relied on multiple policy tools and instead centered policy signaling around a single key rate — the seven-day reverse repo rate — in order to guide markets more efficiently.

At the same time, the central bank has gradually reduced the role of longer-tenor policy tools by adjusting bidding mechanism and scrapping a unified cost.

In July 2024, it announced plans to conduct temporary overnight repo and reverse repo to help guide market rates within a narrower range, though it has yet to carry out such operations. 

Rate Outlook

The PBOC last cut its seven-day policy rate by 10 basis points to 1.4% in May 2025, far less than the 40 to 60 basis points of reductions many economists had expected for the year. 

This year, many economists have pushed back their forecasts for the next rate cut to 2027 as factory-gate inflation picks up, driven by the Iran war and higher oil prices. Still, weak consumer spending and investment data released this week suggest growth risks are mounting, potentially adding pressure on policymakers to ease.

The PBOC has in recent weeks guided overnight funding rates to rebound to the 1.4% policy rate level, after abundant liquidity pushed market borrowing costs down to around 1.2% and fueled concerns of bubbles in the bond market.

The PBOC does not currently have a regularly used overnight policy rate. In recent months, it signaled that it’s monitoring the overnight market borrowing costs more closely instead of the seven-day tenor. Since January, it has included analysis in its monthly reports tracking the spread between the overnight repo rate in the interbank market and the seven-day rate. 

That focus became more explicit in its quarterly report released in May, when the PBOC pledged to “guide overnight interest rates to operate near policy interest rates.” It also reiterated a commitment to keep monetary policy “moderately loose.” 

Published on June 17, 2026

The Middle ​East crude market
weakened sharply this week, slipping into discounts, Reuters
data showed, after the United States and Iran agreed ‌a framework
deal to reopen the crucial Strait of Hormuz, brightening the
global supply ​outlook.

With Asian refining demand led by China still subdued after
months of run cuts, ⁠hopes of higher supply after the deal pushed
Dubai and other Middle East benchmarks into contango and opened
rare arbitrage opportunities to Europe and the United States.

Benchmark Dubai’s premium to swaps slipped into a discount
of 46 cents on ‌Tuesday, the first contango structure since
January, Reuters’ data showed, after hitting pre-war levels of
$2.06 per barrel on Monday.

Contango is a market structure in which prompt cargoes trade
at ‌a discount to later-dated ones, indicating ample supplies.

Similarly, spot Oman, Murban differentials flipped into
discounts ‌of ⁠67 and 49 cents, respectively on Tuesday.

Spot premiums for Dubai and Oman hit ⁠record highs of more
than $60 per barrel while Murban’s peak was more than $50 in
March after the conflict disrupted supplies.

“While practical timelines for the reopening remain
uncertain, an estimated 4 million barrels per day of crude was
already navigating the waterway prior to ​the diplomatic
breakthrough,” said Kpler’s senior crude oil ‌analyst Naveen Das.

“A formal reopening will unleash millions of barrels
currently trapped in floating storage, directly inflating the
physical volumes that dictate the Dubai benchmark and applying
intense downward pressure on regional pricing.”

Before its closure, the Strait carried about a fifth of
global supplies of crude oil and ‌liquefied natural gas.

The Dubai benchmark has been weakening since April as
elevated crude costs curbed ​buying interest from Asian refiners,
prompting run cuts and higher purchases of alternative grades
from regions such as the United States.

Ahead of the signing of a preliminary agreement ⁠between the
U.S. and Iran to end their conflict, some Middle Eastern
producers managed to export some oil out of the strait, which
eased supply tensions.

Abu Dhabi National Oil Company (ADNOC) has sold at least 30
million barrels ‌of spot crude to Asian refiners and trading
firms so far this month and offered more this week.

ARBITRAGE TO US, EU OPEN

The collapse in Middle East crude prices has also reopened
arbitrage opportunities to destinations beyond Asia.

About four to five Very Large Crude Carriers carrying Abu
Dhabi’s Murban and Das crude were heading to Europe, according
to one trader，who added that the cargoes belong to Exxon Mobil
. Each VLCC can carry 2 million barrels of oil.

Another trader estimated 13 million to 15 million ‌barrels of
Middle East crude, including Upper Zakum, Murban, Oman and Iraqi
Basrah Medium, are being shipped to the U.S. and ​Europe by oil
majors Exxon and TotalEnergies.

The companies typically do not comment on commercial deals.

The shipments became economical for Europe after weak Asian
demand and falling Middle East ⁠crude premiums narrowed the price
gap with competing Atlantic Basin supplies, traders said.

Murban has become cheaper than U.S. ⁠West Texas Intermediate
crude (WTI) for European buyers as demand in Asia is weak, two
traders said.

The arbitrage for U.S. WTI to Asia has also closed since
early June, traders said, putting ‌pressure on the U.S. benchmark
grade.

WTI Midland in west Texas flipped on Tuesday to trade at a
premium to the same grade in Houston for the first time since
late May, as ​export demand slipped on a rapidly closing
arbitrage window.

Published on June 17, 2026