June 10 (Bloomberg) -- Brazil's economy grew 5.8 percent in the first quarter, powered by accelerating consumer spending that is stoking inflation and forcing the central bank to raise interest rates.

The growth rate slowed from 6.2 percent in the last three months of 2007 and matched the median forecast in a Bloomberg survey of 33 economists. Household consumption rose 6.6 percent in the first quarter from a year ago, its 18th straight quarterly gain, the national statistics agency said today in Rio de Janeiro.

Domestic demand, fueled by credit, government spending and rising incomes, is helping Latin America's biggest economy offset declining exports. The central bank will raise the benchmark interest rate to 14 percent by the end of the year from the current 12.25 percent to cool the economy and bring inflation down from a two-year high, a central bank survey showed this week.

``No matter what happens to the U.S. economy, Brazil's economy will continue to expand,'' said Alfredo Coutino, senior economist for Latin America at Moody's Economy.com in West Chester, Pennsylvania. ``Domestic demand and a wise decision to increase public spending on infrastructure at the start of the year are making up for declining exports.''

Government spending jumped 4.5 percent in the first quarter from the last quarter of 2007, the statistics agency said. Exports fell 2.14 percent from a year ago, their first quarterly decline since June 2006.

Easter Holiday

First-quarter growth, the second fastest in almost four years, may have slowed from the end of 2007 because of an early Easter holiday, Coutino said. He estimates GDP in 2008 will expand at a rate similar to the 5.4 percent last year, the fastest pace since 2004.

Policy makers raised interest rates twice by half a percentage point in April and June to 12.25 percent from 11.25 percent. Inflation has been above the 4.5 percent target since January. The April increase was the first in nearly three years.

The prospect of future central bank rate increases may curtail the availability of credit next year, said Carlos Thadeu de Freitas Gomez, chief economist with Brazil's National Confederation of Commerce.

``The economy is strong but we can't say for sure it'll continue this way if inflation eats into consumer incomes and credit begins pulling back,'' Freitas said in a telephone interview from Rio.

`Not Scared'

Consumer loans, excluding credit cards, will grow by 25 percent this year after expanding 40 percent in the first quarter, said Erico Ferreira, president of the National Association of Credit, Financing and Investment Institutions. That will help drive sales of big-ticket items like cars, homes appliances and electronics, he said.

``Brazilians don't get scared by 6 percent inflation,'' Ferreira said in a phone interview from Sao Paulo. ``Companies want to profit from the growing economy and they know that to do so they need to offer longer maturities at lower rates.''

Vehicle registrations climbed 27 percent last year to a record 2.46 million units. Loan maturities for cars have doubled to 72 months since President Luiz Inacio Lula da Silva took office in 2003.

``Brazil is one of the most insulated from a U.S. economic recession spreading overseas because it has such a huge domestic market to fall back on,'' Francisco J. Larios, chief economist for emerging markets at Decision Economics Inc., said in a phone interview from Miami.

To contact the reporter on this story: Andre Soliani in Brasilia at asoliani@bloomberg.net; Joshua Goodman in Rio de Janeiro at jgoodman19@bloomberg.net.

Last Updated: June 10, 2008 12:09 EDT