Business | Economy

Brazil to scrap federal taxes on certain food staples and toiletries

Tax break comes after surprise price jump in February

  • Reuters
  • Published: 15:14 March 9, 2013
  • Gulf News

Sao Paulo/Brasilia: Brazil said on Friday it will scrap federal taxes on certain food staples and toiletries, the latest in a series of measures to curb prices after a surprise jump in inflation in February triggered alarm bells.

Inflation rose more than expected last month despite a government-sponsored cut in electricity rates, raising prospects of an interest rate hike even as policymakers fret about a sluggish economy.

Brazil’s benchmark IPCA consumer price index rose 0.60 per cent in February, statistics agency IBGE said on Friday, above all 39 forecasts in a Reuters poll. The index had risen 0.86 per cent in January.

Hours after the data was released, President Dilma Rousseff said in a television address that tax breaks on household staples should lower the price of products by between 9.25 per cent and 12.5 per cent. She also added three toiletry items to the list of 13 products in the basket of goods, which includes beef and beans, deemed essential for a Brazilian family to live for a month.

“I don’t overlook inflation controls for a single moment because economic stability is crucial for all of us,” said Rousseff, adding that the move will cost her government 7.4 billion reais ($3.80 billion) in tax revenues a year.

“That’s why I don’t stop looking for new ways to reduce the cost of life of Brazilians and protect their purchasing power.”

Her comments are a clear indication that the government is shifting its focus from the slow recovery to high inflation, which could not only hurt the economy, but also Rousseff’s re-election bid next year.

Yields on interest rate futures jumped on the Sao Paulo BM&FBovespa exchange as traders increased bets that Brazil’s central bank would lift its overnight lending rate as early as next month. The country’s Bovespa stock index fell 0.7 per cent on Friday after two days of steep gains.

Brazil’s currency, the real, rose past 1.95 per dollar for the first time since May as some investors bet the central bank would welcome a slightly stronger exchange rate to help tame inflation.

In the 12 months through February, inflation rose 6.31 per cent, the biggest increase since December 2011. The central bank targets inflation at 4.5 per cent, with a tolerance band of plus or minus 2 percentage points.

The inflation report “pushes the central bank up against the wall,” Enestor dos Santos, an economist with BBVA in Madrid, said in a research note.

Government officials, however, were more sanguine about the inflation outlook. Speaking to reporters in Brasilia, Deputy Finance Minister Nelson Barbosa said inflation was under control and would slow “gradually” throughout the year on lower international food prices.

He also said inflation would converge toward the centre of the target range at the “adequate” moment.

Rousseff has slashed taxes on dozens of products to revive an economy that has struggled to grow in the last two years. Some of those cuts have also been aimed at easing inflation that is rapidly becoming a headache for her administration.

Without the cut in power rates announced in January, which slashed 0.48 percentage point from February’s IPCA index, 12-month inflation would have already topped the target ceiling.

“Inflation should surpass the target ceiling as early as March,” said Flavio Serrano, an economist with Espirito Santo Investment Bank.

The index had been expected to rise 0.49 per cent in February, according to the median forecast in the Reuters survey. Estimates ranged from 0.38 per cent to 0.56 per cent.

Services prices, boosted by record-low unemployment and a steep rise in wages over the past few years, rose 1.30 per cent from January, the highest monthly reading since February 2009, according to a report from Nomura.

Prices of 72.3 per cent of items surveyed by IBGE rose in February, slightly below January’s percentage but still at a high level, analysts said.

Rising inflation has complicated Rousseff’s efforts to bolster the economy. The central bank, which slashed interest rates 10 consecutive times between August 2011 and October 2012 to an all-time low of 7.25 per cent, this week suggested it could raise them as early as next month.

The bank dropped a reference in its statement about maintaining low rates for a prolonged period.

A Reuters poll on Thursday showed a slight majority of economists already expected a rate increase this year.

Electricity prices dropped 15.17 per cent in February, IBGE said, driving housing costs down by 2.38 per cent.

However, food inflation slowed only modestly, with an increase of 1.45 per cent in February versus a 1.99 per cent jump the previous month, while education costs soared 5.40 per cent because of annual tuition increases nationwide.

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