Brazil's industrial output falls in 2022, gloomy scenario likely to continue

SAO PAULO, Feb 3 (Reuters) - Industrial production in Brazil ended 2022 with a 0.7% drop on the previous year, government statistics agency IBGE said on Friday, losing some of the gains the sector recorded in 2021 after a pandemic-related downturn.

IBGE said the retreat came on the back of rising interest rates, which directly affected the cost of credit, as well as high inflation hurting household consumption in Latin America's largest economy.

Economists expect the gloomy scenario to continue after output remained unchanged in December from November, matching the market's median estimate in a Reuters poll.

After starting 2022 with a positive tone due to government stimulus measures, Brazil's industrial sector stuttered in the second half of the year.

Andres Abadia, chief economist for Latin America at Pantheon Macroeconomics, said the industrial recession would likely continue in the first quarter due to "stiflingly high interest rates, the lagged effect of lingering supply issues, and less-supportive global growth".

When compared with the previous year, IBGE reported production in December retreated 1.3%, slightly below a 1.1% drop consensus.

William Jackson, chief emerging markets economist at Capital Economics, said the fresh data showed the sector was a drag on Brazil's economy in late 2022, with early signs indicating that January was no better.

"Even so, it's clear that the central bank is focused on growing inflation risks rather than weakening activity and we expect interest rates to be kept on hold for most of this year," Jackson said.

The central bank on Wednesday kept its benchmark interest rate at a six-year high of 13.75% and said it was considering holding the policy rate at that level for longer than markets expect due to fiscal risks.

Brazil's industrial output remains 2.2% below the pre-pandemic levels of February 2020 and 18.5% below the May 2011 all-time high, IBGE said. (Reporting by Gabriel Araujo Editing by Ben Dangerfield)