Brazil to Scrap Food Taxes as Rousseff Fights Inflation

Brazil plans to scrap all federal taxes on its basket of staple foods as the government seeks to slow inflation in Latin America’s biggest economy, President Dilma Rousseff said. Swap rates rose after she spoke.

Inflation quickened to 6.02 percent through mid-January and has exceeded the central bank’s 4.5 percent target for the past 29 months. Economists estimate 2013 inflation at 5.68 percent, according to the median estimate in a central bank survey published yesterday.

Last month, the government announced cuts to utility rates as part of a plan to improve competitiveness and tame consumer price increases. With the economy recovering at a slower than expected pace, the administration is seeking alternative measures to rein in inflation, instead of raising the benchmark interest rate that is at a record low 7.25 percent, said Daniel Snowden, emerging markets analyst at Informa Global Markets.

“Food has been one of the main drivers of inflation so it makes sense to target it,” Snowden said by phone from London. “They don’t seem to want to lift interest rates at all, so they’re looking at other ways to cut prices. She’s also looking toward the next election and cutting food prices is always a popular measure.”

Swap rates due in January 2015 dropped one basis point, or 0.01 percentage point, to 7.98 percent at 1:50 p.m. in Sao Paulo. The real appreciated 0.5 percent to 1.9852 per dollar.

‘Total Cut’

“We are studying a total cut of federal taxes on the basic foods basket,” Rousseff said, according to the audio of a interview with local radio stations posted on the presidency’s website today. “We will cut those taxes.”

While annual inflation is “no way near” the ceiling of the central bank’s target range of 2.5 percent to 6.5 percent, Rousseff said, the government will seek to reduce the rate.

Energy cost reductions, a large supply of grains and previous tax breaks will more than offset the impact of a gasoline price increase announced last month and help reduce inflationary pressure, Rousseff said.

Rousseff’s announcement would have had a greater impact on swap rates last year, before the market began to see through tax cuts that only delay inflationary pressure caused by supply constraints while weakening government finances, said Tony Volpon, chief emerging markets analyst at Nomura Securities International Inc.

Rousseff in September vetoed a bill approved by Congress that had eliminated all federal taxes on basic foods. The move would have cost the government 5.1 billion reais ($2.6 billion) per year, according to the Sao Paulo Industry Federation.

“The market now understands that this doesn’t do anything for underlying inflation dynamics,” Volpon said by telephone from New York. “If you want to control inflation, re-anchor expectations, you’re going to have to raise interest rates and that’s why these things are not having an impact.”

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