BRASILIA, June 4 (Reuters) - The Brazilian government has dropped plans to help car manufacturers struggling with lower demand and growing inventories, a government official close to the negotiations with banks and industry said on Wednesday.
The government was in talks with banks to create a guarantee fund to ease interest rates for car buyers. The fund would have been created with some of the reserves banks are required to keep at the central bank.
The measure was put on the back burner after banks said the fund would have little short-term impact on the concession of car loans, said the official who spoke on condition of anonymity because he was not allowed to speak publicly.
Brazil's slowing economy and expiring tax breaks have slowed the pace of car sales in the world's No. 4 auto market and raised the specter of layoffs in an electoral year.
The government of President Dilma Rousseff, who is running for re-election in October, has little fiscal room to stimulate an economy that is expected to post a fourth straight year of meager growth.
Taking some pressure off the government, Brazil is close to inking a deal to extend tariff-free sales of cars and parts with Argentina for another year, a second government source said.
Brazilian Finance Minister Guido Mantega said the government could also opt for a gradual return of the IPI tax on automakers, which was removed a few years ago to stimulate car sales.
Brazil is a key base of operations for automakers including Italy's Fiat SpA, Germany's Volkswagen AG and U.S.-based General Motors Co and Ford Motor Co.
(Reporting by Luciana Otoni; Writing by Alonso Soto; Editing by Lisa Shumaker)