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China Central Bank Raises Interest Rates To Cool Overheating Economy

In response to the rapid pace of growth in the world’s fastest growing economy, the People’s Bank of China raised interest rates by 27 basis points. Bringing the benchmark lending rate to an eight year high of 6.84 percent, policy makers additionally increased the deposit rate to 3.33 while cutting the tax on interest income, hoping to promote savings. The tax rate will incidentally drop to 5 percent from 20 percent beginning August 15th. Already expected by the market, the decision will, however, likely do nothing in denting the current pace of economic growth as money continues to pour into China, especially the stock market. For the year, with speculation on the bid side running rampant, the benchmark index has risen 95 percent after more than doubling returns in the previous year. Subsequently, the gains have supported higher consumer and business spending, driving economic growth to the fastest in 12 years. Ultimately, the market should expect further tightening measures (if they are to come) in the near term with the proposal of a more flexible currency regime still on the back burner. With the decision widely digested by the equity markets already, the currency was taken back a bit in the overnight session, falling to 7.5740 against the US dollar as well as the Euro and the British pound. Incidentally, there was some speculation that had surfaced over a potential intervention by the PBoC, helping the Chinese yuan to drop in dramatic fashion.