Nomura: Central bank shifts to overnight rate anchor: funding rate corridor moves lower, Nomura expects no rate cut this year

What changed in the policy rate anchor?

China’s central bank announced on 30 October that, starting 2 November, it would conduct overnight reverse repos every business day through fixed-rate, quantity-based auctions, at an operating rate of 1.25%. The 7-day reverse repos will mainly be conducted around tax payment periods and month-end, switching to fixed-quantity, interest-rate auctions.
Previously, the 7-day reverse repo rate had remained at 1.40% since May 2025. The central bank’s announcement did not explicitly designate a new policy rate, but Nomura believes the overnight reverse repo rate has effectively become the main policy anchor.
Central bank governor Pan Gongsheng previously noted that DR001, the interbank overnight repo rate, had effectively become the operating target, while the main open market operation instrument and policy rate still had a 7-day tenor. Aligning the tenors would help improve the precision of interest rate management.

Instruments previously priced at a fixed spread to the 7-day rate have been re-anchored to the overnight rate. Temporary overnight repo and reverse repo rates remain 25 basis points below and above the policy rate, respectively, so the operating corridor has moved down from 1.15%–1.65% to 1.00%–1.50%.
Nomura believes the lower floor means the central bank is willing to let the overnight rate fall further before draining liquidity, indicating greater tolerance for ample funding. The lower ceiling reduces the cost of liquidity support when funding is tight.

Nomura believes the switch in the policy rate from the 7-day rate of 1.40% to the overnight rate of 1.25% will not automatically trigger a reduction in the loan prime rate (LPR). When the policy rate shifted from the one-year MLF to the 7-day reverse repo in March 2025, the LPR was not adjusted immediately either.
Market rates had previously driven lending rates lower: the average DR001 in the second quarter of 2026 was 1.30%, down 23 basis points year on year; over the same period, the average bank lending rate fell to 3.05%, down 24 basis points year on year.
The report puts the current DR001 at approximately 1.28%, close to the new overnight operating rate of 1.25%. On that basis, Nomura believes the central bank faces limited near-term pressure to cut rates and maintains its forecast of no policy rate cut for the remainder of 2026.

Financing costs for the 7-day, 1-month and 3-month tenors of renminbi repos for foreign central bank-type institutions (FIMA renminbi repos) will fall by 15 basis points as the pricing benchmark moves lower. Foreign-funded renminbi clearing banks were added to the eligible counterparty pool on 20 October and can use the facility to support offshore renminbi business at lower cost.
Nomura believes this could help ease spikes in offshore renminbi funding costs during periods of stress and strengthen the transmission of onshore policy rates to offshore rates. The actual impact depends on how much eligible institutions use the facility and how much lower-cost funding is passed through to the offshore market.