March 8, 2013 / 12:45 PM / in 5 years

UPDATE 4-Brazil to cut household staples taxes as inflation fears mount

* Rousseff says committed to control inflation
    * Tax break comes after surprise price jump in February
    * IPCA index rose 0.6 percent in Feb, above expectations
    * Market shows increased bets for interest rate hikes

    By Silvio Cascione and Ana Flor
    SAO PAULO/BRASILIA, March 8 (Reuters) - 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
    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 percent in February, statistics agency IBGE said on
Friday, above all 39 forecasts in a Reuters poll. The index had
risen 0.86 percent 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
percent and 12.5 percent. 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 percent 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 percent, the biggest increase since December 2011. The
central bank targets inflation at 4.5 percent, 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 center 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 percent in
February, according to the median forecast in the Reuters
survey. Estimates ranged from 0.38 percent to 0.56 percent. 
    Services prices, boosted by record-low unemployment and a
steep rise in wages over the past few years, rose 1.30 percent
from January, the highest monthly reading since February 2009,
according to a report from Nomura. 
    Prices of 72.3 percent 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 percent, 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 percent in February, IBGE
said, driving housing costs down by 2.38 percent. 
    However, food inflation slowed only modestly, with an
increase of 1.45 percent in February versus a 1.99 percent jump
the previous month, while education costs soared 5.40 percent
because of annual tuition increases nationwide.    
    Below is the result for each price category:     
                                    January    February
 - Food and beverages                  1.99        1.45
 - Housing                            -0.20       -2.38
 - Household articles                  1.15        0.53
 - Apparel                            -0.53        0.55
 - Transport                           0.75        0.81
 - Health and personal care            0.73        0.65
 - Personal expenses                   1.55        0.57
 - Education                           0.35        5.40
 - Communication                      -0.08        0.10
 - IPCA                                0.86        0.60
0 : 0
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