Brazil reduces foreign capital controls as currency tanks
surprise move that could help stop a sharp depreciation of the country's currency that threatens to stoke already high inflation in Latin America's largest economy.
* Gov't to scrap tax on foreign purchases of local debt
* Surprise move likely to help ease fall of real
* Cbank official said earlier real likely to stay weak
* Investors see mixed messages in gov't fx policy
By Nestor Rabello and Alonso Soto
BRASILIA, June 4 (Reuters) - Brazil will scrap a tax on foreign investments in local debt, a surprise move that could help stop a sharp depreciation of the country's currency that threatens to stoke already high inflation in Latin America's largest economy.
In a hastily called press briefing, Finance Minister Guido Mantega said that a drop in foreign inflows prompted the removal of the financial transaction tax, known as IOF, on foreign purchases of government bonds and other fixed-income investments.
"We have observed a reduction in the international liquidity coming to Brazil... We are removing the obstacles for the entry of capital," said Mantega, who added that the move was not aimed at fighting inflation.
Still, the reduction of capital controls will likely help the real rebound from near four-year lows and ease pressure on inflation, which has turned into a political liability for President Dilma Rousseff as she prepares to run for re-election next year.
Financial markets will likely welcome the move, but analysts say the change in rules again highlights policy contradictions that undermine investor confidence in a country that risks posting a third year of mediocre economic growth.
"They are sending very mixed and convoluted messages on why they are doing one thing or the other," said Enrique Alvarez, head of research for Latin America at IDEAglobal in New York.
"This is another clear example of how the central bank is losing its aura of independence."
Earlier in the day, central bank director Aldo Mendes said Brazil may have to live with a weaker real if the depreciation was in line with the movement of other currencies.
The real fell more than 1 percent on Mendes' comments, but reverted losses in the final minutes of trading on speculation the government planned to scrap the IOF tax.
The Brazilian central bank, which enjoys de-facto independence, surprised investors on Wednesday with an aggressive 50-basis-point interest rate hike in a bid to control naggingly high inflation.
POLICY REVERSAL
The removal of the 6 percent tax, effective Wednesday, takes away a key barrier Brazil had raised to prevent the real from strengthening too much and hurt local industries and exporters.
The IOF tax, which was first raised in late 2009, was aimed at limiting the surge of cheap money flowing into the country after developed nations loosened monetary policies to stimulate their economies.
However, worries that the United States would soon cut monetary stimulus has turned things around, dragging down the real and other emerging-market currencies.
"Today, with the market returning to normal and the (U.S. Federal Reserve) likely reducing its expansionist policy, we can remove this obstacle," Mantega said.
The policy reversal in Brazil could make the real more vulnerable to news from abroad and demand more intervention from the central bank to stem volatility, economists at Barclays wrote in a note to clients. |
