Brazil's government has tried to stem a sharp depreciation in the real (BRL) that had threatened to fuel already high inflation in Latin America's largest economy by scrapping their Financial Transaction Tax.
The country's finance minister, Guido Mantega, said that a drop in foreign inflows prompted the removal of the financial transaction tax, known as the IOF, on foreign purchases of government bonds and other fixed-income investments. "We have observed a reduction in the international liquidity coming to Brazil," he added. "We are removing the obstacles for the entry of capital."
The abolition of the 6% tax, effective immediately, removes a key barrier that Brazil raised to prevent the BRL from strengthening too much. The appreciation of the currency was hurting local industries and exporters. The IOF tax was introduced in late 2009, with the aim of limiting the surge of cheap money flowing into Brazil after developed nations loosened monetary policies to stimulate their economies.
Mantega stressed that the move was unrelated to prices. "There is no intention on the part of the government to conduct anti-inflationary policies through the exchange rate," he said, rather the IOF was withdrawn to reflect the regularisation of the market.
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