The cut to the gasoline tax will allow state-controlled energy company Petrobras to improve its profit margins without resorting to a price increase at the pump for consumers, which would have had the secondary effect of making inflation even worse.
The rising IPCA price index has been one of President Dilma Rousseff's biggest challenges during her first year in power, up 7.33 percent in the 12 months through mid-September well above the government's 6.5 percent target ceiling.
The IPCA has been above the target range of 4.5 percent, plus or minus 2 percentage points, since April.
The combination of speeding inflation and Brazil's slowing economy, plus the financial crisis in Europe, has rattled Brazilian financial markets in recent weeks.
Fuel costs have added to the inflation problems, and a heated labour market has caused concern for policy-makers such as central bank chief Alexandre Tombini as well.
With unemployment near record lows, wages have been steadily rising, giving workers more money to spend on everything from new cars to home appliances.
Workers in a number of industries have either threatened to strike or have walked off the job unless their expectations are met for big wage increases.
The latest group on Tuesday were bank workers, who voted to start an indefinite strike. They joined the nation's postal workers, who began a strike two weeks earlier.
The bank workers are asking for a 12.8 percent wage increase, while the banks are offering 8 percent, local media reported.
The workers' demands illustrate how many Brazilians are simultaneously trying to protect themselves from rising prices and also cash in the economic boom of recent years. Both behaviours are likely to complicate policy-makers' efforts to bring down inflation during coming months.
Despite the pressures, Tombini said in a central bank presentation to Congress on Tuesday that inflation was under control.
That comes from both a slowing domestic economy and worries abroad, Tombini told lawmakers.
Last month, the central bank pointed to a euro-zone sovereign debt crisis and a faltering US economy to explain an interest-rate cut to 12 percent from 12.5 percent.
Tombini on Tuesday said the outlook abroad would be disinflation until 2012, with commodities, after a spike earlier this year, a more benign factor.
Complicating the outlook for inflation, however, has been a weakening in Brazil's currency, the real
A steeping of risk aversion abroad has taken the real to losses of 12 percent for the month against the US dollar.
That prompted speculation that the government could walk back some of its previous efforts to contain currency strength earlier this year.
But Finance Minister Guido Mantega on Tuesday said that he was not considering changes to a tax on currency derivatives.
And some economists worry that the interest-rate cut was premature, particularly with inflation still above target.
Economists in a weekly central bank survey now see the IPCA closing the year at 6.52 percent just above the target band.
If that happens, Tombini is required to explain why that happened and what policy-makers will do about it to the finance ministry.
Copyright Reuters, 2011