In an unexpected move, Brazil has cut its financial transactions tax on overseas investments in domestic bonds from 6% to zero.
The move, reportedly, could stoke the already high inflation in Brazil, Latin America’s largest economy.
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The removal of the tax, known as the IOF, cuts a key defence measure Brazil had set up in late 2009 to prevent a surge in money inflows after developed nations loosened their monetary policies with the objective of stimulating their economies.
Brazil’s finance minister, Guido Mantega, said, "Today, with the market returning to normal and the (US Federal Reserve) likely reducing its expansionist policy, we can remove this barrier we had placed."
There is also a growing concern in Brazil that a sharp depreciation of the ‘real’ could worsen inflation, which is already close to being near the top of the central bank’s target range.
On 31 May, the European Union decided to hold back its planned financial transactions tax (FTT), cut back the level of the tax, and largely limited its scope after leaders realised it could cause big damage to the economy.
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By GlobalData
