Brazil's economy cooled in 2025 under weight of high interest rates

* GDP growth slowed from 3.4% in 2024 to weakest since 2020

* Central bank has held interest rates at 15% since July

* Services growth slowed to 1.8%, household consumption down (Adds comments from Finance Ministry in paragraphs 10-12, further data in paragraphs 13-16)

By Marcela Ayres

BRASILIA, March 3 (Reuters) - Brazil's economy grew 2.3% in 2025, its weakest performance since during the COVID pandemic in 2020 as high interest rates squeezed consumption and investment, official data showed on Tuesday.

Latin America's largest economy posted just 0.1% growth in the fourth quarter from the previous three months, in line with a Reuters poll. That reinforced expectations of imminent rate cuts after the central bank signaled it would start monetary easing when it meets later this month, despite above-target inflation.

Last year's economic slowdown came amid restrictive monetary policy aimed at steering inflation - which stood at 4.1% in the 12 months to mid-February - toward the central bank's 3% target.

Economic growth last year slowed from a 3.4% expansion in 2024 and marked the weakest performance since a 3.3% contraction in 2020. In the fourth quarter, gross domestic product rose 1.8%, statistics office IBGE said, in line with market expectations.

Brazil's economy had proved slow to cool following stimulus measures introduced when President Luiz Inacio Lula da Silva took office in 2023, which boosted demand and helped growth outperform earlier expectations.

Central bank policymakers paused an aggressive tightening cycle last July and have since kept the benchmark Selic rate at 15%, the highest in nearly two decades. They signaled in January their intention to begin cutting rates this month.

The central bank said in December it expected the economy to grow 2.3% in 2025 and slow further to 1.6% growth this year.

The Finance Ministry, however, reiterated in a statement on Tuesday a more upbeat forecast of 2.3% growth this year, arguing that a stronger slowdown in agriculture would be offset by faster expansion in industry and services.

For the first quarter, the ministry's economic policy secretary projected a "sharp acceleration" in quarter-on-quarter GDP growth, close to 1%. Its outlook reflected the rollout of an expanded income tax exemption for workers earning up to 5,000 reais ($954.05) per month, a key pledge from Lula, who is seeking re-election in October's general election.

"Thereafter, activity growth should gradually slow, as the effects of public policies fade and are only partly offset by lower borrowing costs," the ministry said.

SERVICES SECTOR SLOWS

In 2025, growth in Brazil's services sector, the main engine of its economy, slowed to 1.8% from 3.8% a year earlier.

Buoyed by a record harvest, particularly soy and corn, agriculture expanded 11.7%, while industry grew 1.4%, supported by oil and gas extraction.

On the demand side, IBGE highlighted weaker growth in household consumption, which rose 1.3% in 2025 compared with 5.1% in 2024, "mainly due to the adverse effects of contractionary monetary policy."

Government spending increased 2.1% last year, versus 2.0% in 2024, while gross fixed capital formation, a proxy for long-term investment, rose 2.9%, well below the 6.9% expansion seen the year before. ($1 = 5.2408 reais) (Reporting by Marcela Ayres; Editing by Gabriel Araujo, Brad Haynes and Susan Fenton)