BRASILIA Economic activity in Brazil declined in May, showed a central bank index on Monday, signaling a non-linear trajectory for the country's growth, even as analysts have been consistently revising their forecasts upward for the year.

The IBC-BR economic activity index, a key gauge of gross domestic product (GDP), declined by a seasonally adjusted 2.0% compared to April, disappointing analysts who had expected zero growth according to a Reuters poll.

This marked the largest monthly drop since March 2021. The observed data series recorded a 2.15% increase on a year-on-year basis, resulting in an accumulated growth rate of 3.43% over the past 12 months.

Gabriel Couto, economist at Santander Brazil, stated that the frustrating outcome could be attributed to the end of contribution from the record grain production witnessed during the 2022-23 summer crops.

Speaking to reporters, Finance Minister Fernando Haddad said the numbers came in "as expected" amid an environment marked by persistently high borrowing costs.

"The economic slowdown intended by the central bank has arrived strongly, and we need to be cautious about what may happen," he said, emphasizing that current real interest rate levels are imposing a heavy burden on the economy.

The central bank has held its benchmark interest rate steady at a cycle-high of 13.75% since September to tackle inflationary pressures. Still, it has recently indicated the possibility of a rate cut in August if the inflation scenario continues to improve.

Andres Abadia, chief Latin America economist at Pantheon Macroeconomics, wrote in a note to clients that the performance underscores the need for interest rate cuts.

"Several key economic sectors are under pressure, on the back of tighter financial conditions, but low inflation, a resilient labor market, and still-supportive external conditions for Brazil’s key exports, suggest that economic growth will not grind to a halt," he said.

Economists have continuously revised their expectations for the performance of Latin America's largest economy this year, particularly following a stronger-than-anticipated first quarter, buoyed by a thriving agricultural sector.

However, due to seasonal factors, the farm sector is expected to decelerate in the year's second half.

According to a weekly survey conducted by the central bank among private economists, GDP growth for 2023 is now estimated at 2.24%, a decrease from 2.9% in 2022 but still significantly higher than the approximately 0.8% initially forecast when the year started.

Nevertheless, expectations going forward point to a slowdown amid financial constraints and high borrowing costs.

(Reporting by Marcela Ayres; Editing by Jason Neely, Steven Grattan and Andrea Ricci)