BRASILIA (Reuters) - Brazil's economic activity again surprised on the upside in August, central bank data showed on Monday, reinforcing a view of heated economic momentum that prompted policymakers to kick off a monetary tightening cycle last month.
Members of the bank's interest rate-setting committee have mentioned stronger-than-expected activity as a key reason behind the move as it has impacted inflation expectations and consumer price readings, which remain above target.
The IBC-Br index, a leading indicator of gross domestic product, rose a seasonally adjusted 0.2% in August from the previous month, while economists polled by Reuters had forecast a flat reading.
The index based on proxies for output volume in agriculture, industry and services, as well as tax data on production, was also up 3.1% compared to August 2023 and 2.5% over the previous 12 months on a non-seasonally adjusted basis.
Economic indicators released earlier this month had pointed to an unexpected drop in August in the services sector, the most significant driver of Latin America's largest economy, while retail sales volumes also fell, though by less than expected.
Industrial output saw a slight increase.
Goldman Sachs economist Alberto Ramos said Brazil's economy should benefit from fiscal stimulus measures, wage increases and better credit conditions, but that should be balanced by tight domestic monetary conditions.
The central bank last month delivered a 25 basis-point increase that brought the benchmark interest rate to 10.75%.
Expectations embedded in the yield curve point to an accelerated pace of hikes, with more than a 90% chance of a 50 basis-point increase next month.
"Domestic activity is expected to grow at a moderate pace in the second half, after a stronger than expected performance in the first half of 2024," said XP (NASDAQ:XP) economist Rodolfo Margato, forecasting 3.1% GDP growth this year.
The government last month raised its GDP growth expectation to 3.2% this year from 2.5% previously, accelerating from 2.9% in 2023, supported by a robust labor market that has been driving household demand.
But Finance Minister Fernando Haddad said on Monday that the government might need to revise its forecast again.