Brazil's economy retains strong momentum in Q3, fueling inflation concerns

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GDP rose 0.9% quarter-on-quarter, 4.0% year-on-year in Q3

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Finance ministry to bump up current 3.3% annual growth forecast

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Economic strength points to extended interest rate tightening

(Adds comment from Finance Ministry in paragraph 4, comment from economists in paragraphs 6-7 and 11-12)

By Marcela Ayres

BRASILIA, Dec 3 (Reuters) - Brazil's economy slowed in the third quarter but maintained strong momentum, official data showed on Tuesday, reinforcing expectations that the central bank may need to adopt a more aggressive stance to tame inflationary pressures.

Supported by rising investments and a robust labor market that has bolstered household consumption, gross domestic product (GDP) in Latin America's largest economy increased 0.9% in the third quarter, according to statistics agency IBGE, matching the forecast in a Reuters poll of economists.

This followed growth of 1.4% in the second quarter and 1.1% in the first, said IBGE.

The performance prompted the Finance Ministry to signal an upward revision to its forecast of 3.3% annual growth, saying it expects the labor market to "remain resilient in the final quarter of the year".

Year-on-year, GDP increased 4.0% between July and September, outpacing the projected 3.9% rise.

"The strong expansion in Brazil's GDP in the third quarter will add to the central bank's concerns that the economy is running too hot," said Jason Tuvey, deputy chief emerging markets economist at Capital Economics.

Coupled with investor disappointment over a fiscal package published last week that failed to ease doubts about President Luiz Inacio Lula da Silva's commitment to curbing public debt growth, the GDP figure is likely to prompt the central bank to quicken its tightening pace at next week's monetary policy meeting after a 50 basis-point hike in November, Tuvey added.

The economy's strength, underpinned by low unemployment, has helped to determine the central bank's decision to launch a tightening cycle in September, diverging from advanced economies that have shifted to monetary easing.

Data since then has continued to reflect strong activity.

Ahead of the central bank's next decision, incoming governor and current director Gabriel Galipolo said the outlook suggests "higher interest rates for longer," a stance he deemed logical for an economy demonstrating greater dynamism than expected.

"These signs of growth exceeding economic potential raise concerns about rising inflation expectations, increasing bets on a longer tightening cycle, which could lower the projected growth level for 2025," said Polo Capital Management economist and institutional relations chief Arnaldo Lima.

The IBGE revised last year's GDP growth to 3.2%, reflecting the fiscal boost from increased government spending that brings a larger statistical carryover and is expected to drive market projections for this year's expansion closer to 3.5%.

Household consumption was an important driver on the demand side in the three months to September, growing 1.5% from the previous quarter.

Investments, as measured by gross fixed capital formation, also rose by 2.1%, while government consumption expanded by 0.8%.

On the supply side, the services sector, the main engine of the country's economy, grew 0.9% from the prior quarter, while the industrial sector grew by 0.6%.

In contrast, the farm sector contracted by 0.9%. (Reporting by Marcela Ayres; editing by Jason Neely, Chizu Nomiyama and Barbara Lewis)