Dilma Rousseff May Cut Taxes to Tame Down Inflation

Dilma Rousseff, the President of Brazil is planning to cut the federal taxes on ethanol and diesel for reining in consumer prices which have increased more than the expectations set by the analysts, in the course of last 7 months. Though any official confirmation is yet to be made, a Government official with knowledge on this matter divulged these plans. As the plans are yet to be made public, the official has asked to keep the identity under wraps.

Incidentally, these tax cuts were primarily scheduled to happen in July, 2013, however, is now expected to be brought forward mainly because of the expected rise of inflation. In the next 2 months, Brazil’s inflation is possibly going to near the upper limit of 6.5%, set by the Central Bank. If fuel taxes are cut down, the public transportation costs are expected to ease down as well. Incidentally, public transportation costs, in January, increased by 0.75%.

The Central Bank will make a decision on its benchmark interest rate on tomorrow and according to most of the analysts, it will be kept at 7.25%, a record low figure. On 19th February, Alexandre Tombini, the President of Brazil’s Central Bank said that if the policy makers are warranted by the inflation, they can adjust the monetary policy as well. Earlier this year, Rousseff stated that she is considering reducing taxes on food so that the inflation can be tamed.

The Senior Economist of Goldman Sachs Group Inc., Alberto Ramos said that a tax cut, be it on food or ethanol will only serve as a positive shock and effects of the same will last only for short time frame. However, that should do enough to navigate Brazilian economy through this tough time, without increasing the benchmark interest rate.

Brazilian swap rates on contracts, which are due in January, 2014 increased by 2 basis points and is currently at 7.64%. Incidentally, erasing the earlier losses, Real appreciated by 0.5% on today, jumping to 1.9703 per USD.

Marcelo Salomon, who is the Co-Head of Barclay’s Plc., stated that if tax cuts are implemented, the same may prompt traders to trim the bets on a rate increase by, as soon as April.

In January, inflation surged to 6.15% as prices increased by 0.86% during that month. The price jump is more than analysts’ prediction of 0.83%.