UPDATE 2-Brazil economic activity growth cools in December
* IBC-Br index up 0.62 pct in Q4 from Q3
* Official Q4 GDP statistics due March 1
By Silvio Cascione and Camila Moreira
SAO PAULO, Feb 20 (Reuters) - Brazil's fragile economic recovery lost steam in December, rounding out a second straight year of frustrating growth and casting doubts on a steady rebound going forward.
The central bank's IBC-Br economic activity index rose 0.26 percent in December from November in seasonally adjusted terms, the bank said on Wednesday.
The index climbed 0.57 percent in November from October, up from a previously reported 0.40 percent.
The numbers suggest Latin America's largest economy grew less than 1 percent last year despite record-low interest rates and billions of dollars in tax cuts and credit incentives enacted by President Dilma Rousseff's government.
Stagnant industrial output and a surprise drop in retail sales were a drag on Brazil's economy in December, economists said.
Brazil's rate of growth has been expected to triple in 2013 on prospects of stronger investments. But that forecast seems increasingly unlikely now, and could be further endangered by quickening inflation and possible interest rate rises.
"I still think we can grow by around 3 percent this year, but this may not happen, especially if the central bank confirms the interest rate hikes priced in the local yield curve for this year," said Vladimir Caramaschi, chief economist at Credit Agricole CIB in Sao Paulo.
Yields on interest rate futures dropped as traders pared bets on rate hikes later this year. The curve still priced in a rise of more than 100 basis points in the benchmark Selic lending rate in 2013.
The central bank cut the Selic rate ten straight times through October 2012 to a record low of 7.25 percent, pledging to keep it low for a "prolonged" period to bolster growth. After inflation hit its fastest pace in nearly eight years in January, the central bank president, Alexandre Tombini, said the bank could "adjust" its policy.
The IBC-Br index rose a seasonally adjusted 0.62 percent in the fourth quarter, down from 1.12 percent expansion in the prior quarter. In 2012, the IBC-Br index grew a modest 1.64 percent without seasonal adjustments.
Economists closely watch the IBC-Br, regarding it as a proxy for official gross domestic product data. However, in the third quarter the index estimated overall economic expansion to be twice as fast as final statistics showed.
Some local economists said December IBC-Br numbers still supported the view of a gradual economic recovery.
"If we pay close attention to it, we'll see that economic activity expanded about 2.1 percent in the fourth quarter over the same period a year before," said Rafael Leao, an economist at Austin Rating in Sao Paulo. "That means we went back to the same pace we saw before 2012."
"We'll continue to have decent credit supply and a strong labor market in 2013," Leao added. "The global economy should not be as weak as it was last year, too."
The median estimate of 18 analysts surveyed by Reuters was for a rise of 0.40 percent over November. The poll was conducted before the government reported a surprise drop in retail sales in December on Tuesday.
The index, a gauge of activity in the farming, manufacturing and services sectors, rose 1.19 percent over the same month a year ago, without seasonal adjustments.
Brazil's national statistics agency, IBGE, is expected to release official 2012 gross domestic product data on March 1.
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