Brazil's GDP slows more than expected, fueling bets on January rate cut

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Economy grew 0.1% in Q3, below 0.2% forecast

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Interest rates at nearly 20-year high, central bank cautious

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Services sector rose 0.1%, industry 0.8%, agriculture 0.4%

By Marcela Ayres

BRASILIA, Dec 4 (Reuters) - Brazil's economy slowed more than expected in the third quarter as weak services and household spending reinforced signs of cooling under high interest rates, boosting expectations of easing early next year.

Latin America's largest economy grew 0.1% in July-September from the previous quarter, statistics agency IBGE said on Thursday, just below the 0.2% rise forecast in a Reuters poll of economists.

The reading marked a further loss of momentum after a revised 0.3% expansion in the second quarter, as well as a sharp slowdown from 1.5% growth in the first quarter.

Signs of cooling activity are being closely watched by markets for clues on when the central bank might start cutting rates after holding them at restrictive levels for months.

Arnaldo Lima, an economist at Polo Capital, said the data underscores the ongoing slowdown, confirming a soft landing amid muted services growth and modest household consumption.

"This is another indicator that supports our expectation for a rate cut in January," he said.

BORROWING COSTS AT 20-YEAR HIGH Policymakers, who have kept interest rates at their highest in nearly 20 years since July, have said they still see a resilient economy, with sticky services inflation and a tight labor market.

They meet next week for this year's final policy decision, with expectations centered on another hold at 15% while investors look for hints of easing in January or March.

Year-on-year, Brazil's gross domestic product (GDP) grew 1.8%, compared with the poll's 1.7% forecast.

Capital Economics' senior emerging markets economist Liam Peach noted it represented a three-year low. "While there are still reasons for the central bank to remain cautious, an easing cycle now appears just around the corner," he said, also forecasting a January cut.

POSITIVE FARM DATA

IBGE said the services sector, the backbone of Brazil's economy, rose just 0.1% from the previous quarter. Industry grew 0.8%, still supported by extractive activities, while agriculture rose 0.4%.

Although the boost from the soybean crop in the world's largest producer and exporter had faded, as the harvest is concentrated in the first half, IBGE noted that livestock contributed to farm sector performance.

The agency also cited higher corn, orange, cotton and wheat output and yields.

On the demand side, household consumption posted a 0.1% increase, its weakest outcome in a year. Government spending climbed 1.3%, while investment measured by gross fixed capital formation expanded 0.9% despite high borrowing costs. (Reporting by Marcela Ayres; Editing by Gabriel Araujo, Kirsten Donovan)