The Brazilian government intends to begin taxing interest on some savings accounts and may lower taxes on fixed-income funds to maintain demand for government bonds as the Central Bank cuts the benchmark rate.
The tax on earnings from savings accounts of 50,000 reais (USD 23.900) or more, which will go into effect next year if approved by Congress, removes the biggest impediment to future interest rate cuts, central bank President Henrique Meirelles said.
The government is concerned that investors will abandon the debt funds it relies on for bond sales as the benchmark interest rate is set to drop below 10%, and turn to savings accounts, which by law guarantee at least a 6% return. The bank slashed the so-called Selic rate to a record low 10.25% last month in a bid to revive growth.
"We want to discourage investors who today are in other funds from migrating to savings accounts," Finance Minister Guido Mantega told reporters in Brazilian capital Brasília. "If there was a big migration, the savings accounts would stop being a safe haven and begin attracting speculators".
Meirelles said these changes could allow the bank to make "substantial reductions of interest rates in Brazil," if needed.
Savings accounts only will be taxed if the Selic is below 10.5 percent, Mantega said. Any tax breaks on fixed income funds would be temporary, for this year only, until the new levies on savings accounts are enacted, said Bernard Appy, a special adviser to the Finance Ministry.
The yield on Brazil's zero-coupon bonds due January 2010 declined five basis points, or 0.05 percentage point, to 9.44%. Economists expect the Central Bank to cut the benchmark rate to 9.5% at their next policy meeting in June, according to a bank survey published May 8. The Selic will remain below 10% until at least 2011, the same survey of 100 Brazilian economists found.
In related news, Brazilian Budget Minister Paulo Bernardo said Brazil may review its target for economic growth of 2% this year. Speaking in Brasília, Bernardo said "uncertainty" makes it difficult to predict growth and that a decision about the target will be made in coming months.
The Brazilian economy is expected to contract 0.44% in 2009, down from a previous forecast of a 0.30%, according to a weekly survey of analysts by the central bank published this week. Fitch Ratings said Wednesday that Brazil's GDP will probably shrink more than 1% this year.