News
19-10-2010 16:21 Brazil
Brazil raises tax on incoming capital for 2nd time in a month
SAO PAULO, Oct 19 (NNN-MERCOPRESS) - Brazil increased taxes on foreign investments in fixed-income securities for the second time in a month and Finance Minister Guido Mantega said countries trying to defend exports must end the “currency war.”
The IOF tax on foreign inflows will climb to 6% from 4%, Mantega told reporters here yesterday.
He said the government will also close a loophole that allowed investors to avoid the tax on some margin deposits for transactions in futures markets.
The moves aim to curb foreigners’ appetite for short-term investments and curb the dollar inflows that have contributed to the Brazilian Real 7.1% gain in the past three months, the biggest among major Latin American currencies.
Investors are putting money into developing countries such as Brazil amid near-zero interest rates in the US, Japan and the Euro region, which have fuelled demand for higher-yielding assets.
The Real weakened 0.5% yesterday to US$1.6750, before Mantega’s announcement. The currency has gained 1.4% since Oct 4, when Mantega doubled the IOF tax on foreign investment in fixed-income securities to 4%.
The measures will go into effect once they are published in the country’s official gazette later today.
“This currency war needs to be deactivated” Mantega stressed.
Mantega said other measures to stem the Real appreciation could be taken and existing programmes may be expanded if needed. The higher taxes will only affect new flows of money into the country, not deposits already in Brazil.
Countries from China to Japan are seeking to restrain their currencies to gain a trade advantage, roiling financial markets and prompting Mantega to last month warn of a worldwide “currency war.”
European Central Bank President Jean-Claude Trichet said over the weekend that volatility in foreign-exchange markets is “counterproductive.”
Meanwhile economists in a weekly central bank survey raised for a fifth straight week their forecasts for Brazil's benchmark inflation index this year and next underscoring concerns that growth in the economy will raise consumer prices in the months ahead, the bank said.
Economists forecast the benchmark IPCA inflation index at 5.20% for this year compared with the 5.15% rate they had predicted one week ago.
The increase in forecasts came after data last week that showed the index jumped 0.45% in Sept, up sharply from the 0.04% rate in Aug but in line with expectations. Analysts expect strong economic activity this year to increase prices for food and other consumer items in the coming months, fuelling inflation.
Growth estimates this year for Brazil's economy, the largest in Latin America, were kept unchanged from the previous week at 7.55%, the central bank said.
For next year, the IPCA estimates were raised to 4.99% from previous week's 4.98%. The central bank has a 4.5% inflation target for this year and next plus or minus 2 percentage points.
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