Brazil growth holds in Q1, but steep March fall points to cooling

BRASILIA, May 18 (Reuters) - Brazil's economic activity grew 1.3% in the first quarter from the previous three months, central bank data showed on Monday, despite a sharper-than-expected contraction in March.

The IBC-Br index, a proxy for gross domestic product, fell 0.7% in March from February on a seasonally adjusted basis, compared with a 0.2% drop expected in a Reuters poll.

All sectors tracked by the central bank declined, with services, the main driver of Brazil's economy, falling 0.8% from the previous month.

Rafael Perez, an economist at Suno Research, said March's performance reflected a normalization after strong growth in the first two months of the year.

"Part of this movement reflects a high comparison base, as well as the ongoing effects of restrictive monetary policy on economic activity. Even so, the economy remained resilient in the quarter, mainly supported by growth in services and industry," he wrote in a note to clients.

Perez projected that official GDP data, due to be released on May 29, will show growth of 1.0% in the first quarter from the previous three months.

That was faster than the fourth quarter of last year when growth was just 0.1% quarter on quarter.

The central bank data is compiled from the bank's estimates for agriculture, industry and services, as well as production-related taxes.

The data for March adds to signs of an economic slowdown this year, with the central bank expected to continue its monetary easing cycle despite renewed inflationary pressures, partly driven by higher energy prices following the U.S.-Israel conflict with Iran.

The IBC-Br index rose 1.8% in the 12 months through March on an unadjusted basis, and increased 3.1% from a year earlier.

Economists surveyed weekly by the central bank expect economic activity to increase by 1.85% in 2026, after a 2.3% expansion last year.

Policymakers have cut interest rates by 25 basis points at each of their last two meetings, bringing the benchmark rate down to 14.50%.

The bank targets 3% inflation but annual inflation in Latin America's largest economy accelerated to 4.39% in April. (Reporting by Marcela Ayres; Editing by Chizu Nomiyama and Susan Fenton)