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Brazil Said to Plan Fuel Tax Cut to Rein in Consumer Prices

March 5 (Bloomberg) -- Brazil’s President Dilma Rousseff plans to cut federal taxes on diesel and ethanol in a bid to rein in consumer prices that have increased more than analysts expected in the past seven months, said a government official with knowledge of the discussions.

The tax cuts, which are initially scheduled for July, may be brought forward if inflation nears the 6.5 percent upper limit of the central bank’s target over the next two months, said the official, who asked not to be named because he isn’t authorized to speak publicly about the matter. The cut in fuel taxes is targeted at easing public transportation costs, which rose 0.75 percent in January, the official said yesterday.

The central bank tomorrow will keep its benchmark interest rate at a record low 7.25 percent in an effort to fuel economic recovery without further accelerating inflation, according to all 48 economists surveyed by Bloomberg. The bank’s president, Alexandre Tombini, on Feb. 19 said policy makers, who have kept the Selic on hold since October, could adjust monetary policy if warranted by inflation. Rousseff this year said she would reduce taxes on food to also help tame inflation.

“Any positive shock, like a tax cut on ethanol or food, could provide short-term relief,” Alberto Ramos, senior economist at Goldman Sachs Group Inc., said by telephone from New York. “That could be enough to allow them to navigate this difficult period and avoid a rate increase.”

Rate Outlook

Swap rates on the contract due in January 2014 climbed two basis points, or 0.02 percentage point, to 7.64 percent yesterday. The real appreciated 0.5 percent to 1.9703 per U.S. dollar, erasing earlier losses.

The tax cuts could prompt traders to trim bets on a rate increase as early as April, Marcelo Salomon, co-head for Latin America economics at Barclays Plc, said by telephone from New York.

Annual inflation accelerated to 6.15 percent in January, after prices jumped 0.86 percent in the month. Analysts had forecast a 0.83 percent gain, according to the median estimate, in a Bloomberg survey.

Rousseff will closely follow monthly inflation reports to adjust economic policies accordingly, the official said.

To contact the reporter on this story: Raymond Colitt in Brasilia Newsroom at rcolitt@bloomberg.net

To contact the editor responsible for this story: Andre Soliani at asoliani@bloomberg.net

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