By Marcela Ayres

BRASILIA Brazil's economy rebounded more than expected in the first quarter, boosted by a strong farm sector, paving the way for a rosier annual outlook, although high interest rates are still expected to trigger a sharp slowdown.

The country's gross domestic product (GDP) expanded by 1.9% in the three months through March, rebounding from a revised 0.1% contraction in the previous quarter, data from government statistics agency IBGE showed on Thursday.

Growth from the prior quarter exceeded the 1.3% median forecast in a Reuters poll of economists, largely driven by a 21.6% surge in agriculture. The service sector expanded by 0.6%, while the industry declined by 0.1%.

On the demand side, household consumption rose by 0.2%, while government spending increased by 0.3%.

Compared to a year earlier, Latin America's largest economy grew by 4.0% in the first quarter, also more than the projected 3.0% expansion.

President Luiz Inacio Lula da Silva has criticized the central bank for long holding its benchmark interest rate at a six-year-high of 13.75% despite declining inflation, arguing that such high borrowing costs hamper economic activity.

Despite this scenario, the Finance Ministry recently revised its 2023 GDP projection upward to 1.9% growth, citing stronger-than-expected crops and a more robust services sector due to government policies boosting disposable income, such as a higher minimum wage and more generous welfare program.

Private economists surveyed weekly by the central bank have also improved their GDP estimate, now predicting 1.26% growth that still represents a sharp deceleration from the 2.9% increase in 2022.

(Reporting by Marcela Ayres; Editing by Steven Grattan)