Brazil's Growth Short of Estimate

RIO DE JANEIRO -- Brazil's economic recovery continued at a slower-than-expected pace in the third quarter, likely opening the door for the central bank to maintain interest rates at historic lows well into next year.

Brazil's third-quarter gross domestic product expanded 1.3% quarter-on-quarter, while second-quarter GDP was revised downward to growth of 1.1%. The July-through-September figure was well below market expectations for growth of 1.9%.

The data contrasted with comments late Wednesday by Finance Minister Guido Mantega, who said Brazil's economy would grow at an annualized rate of 8% in the third and fourth quarters. While some wondered what happened to the robust recovery, there is a silver lining, economists said.

"The economy is growing at a much more moderate trend than the projections pointed to," said Newton Rosa, an economist at the São Paulo-based Sulamerica Investimento fund. "But this has a positive side in that it shouldn't put pressure on the central bank to raise interest rates in the short term."

Expectations that the Brazilian Central Bank would start to raise rates increased after Wednesday night's meeting of the rate-setting panel. While the panel left the benchmark Selic base interest rate unchanged at 8.75%, it altered its statement that hinted at sooner-than-expected rate increases.

The third-quarter figures abruptly doused those expectations, economists said.

"The numbers throw a bucket of cold water on expectations for a quick increase to interest rates," said Juan Jensen, an economist at the Tendencias consultants group in São Paulo. "The numbers corroborate the central bank's message that the economy is developing without generating any pressures."

Mr. Jensen expects the central bank to embark on a tightening cycle in the second half of 2010, with the Selic ending the year at 10%.

The market consensus is that once the bank starts to boost rates, the increases will come fast and furious. The central bank's weekly survey of the market, released Monday, forecast a Selic of 10.63% by end-2010.

Thursday's GDP data also held some surprises that dimmed the outlook for a stronger rebound from a recession that took hold at this time last year and didn't ease until the second quarter of 2009.

Brazil's industrial sector led the expansion, advancing 2.9% in the third quarter from the second quarter. The service sector also climbed 1.6% quarter-on-quarter. The country's powerhouse agricultural sector slipped dramatically, tumbling 2.5% in the third quarter.

—Rogerio Jelmayer in São Paulo and Gerald Jeffris in Brasilia contributed to this article.