Oct. 2 (Bloomberg) -- Brazilian industrial output rose for an eighth straight month in August as record low borrowing costs and job creation bolster domestic demand.

Production rose 1.2 percent in August from July, after expanding 2.2 percent in the previous month, the national statistics agency said today in a report distributed in Rio de Janeiro. On an annual basis, production fell 7.2 percent, less than the revised 10 percent drop a month earlier.

As evidence mounts that Latin America’s biggest economy is recovering faster than analysts initially expected from its first recession in six years, traders are increasing bets the central bank will lift interest rates early next year to tame inflation.

“Today’s figures show Brazil is quickly leaving the crisis behind, especially when compared with other countries,” said Roberto Padovani, chief economist at Banco WestLB do Brasil SA in Sao Paulo. “It reinforces our call that the recovery will lead the central bank to increase interest rates, probably in April.”

The economy expanded 1.9 percent in the second quarter from the first quarter, according to data released by the national statistics agency on Sept. 11. Analysts in a Bloomberg survey had expected a 1.7 percent advance.

Yields on interest rate futures with July 2010 delivery dropped 3 basis points to 9.22 percent at 10:43 a.m. New York time from 9.25 percent yesterday. The contract has gained 24 basis points since the end of August.

Expansion, Jobs

The central bank ended seven months of rate cuts in September saying a record low 8.75 percent rate was adequate to spur growth without igniting inflation.

Brazil’s $1.6 trillion economy will grow 4.5 percent next year, according to the median estimate in a central bank survey of about 100 analysts published Sept. 28.

The economy created 242,126 new jobs in August, which represents the fastest pace in 11 months, up from 138,402 in the previous month, the Labor Ministry said Sept. 16.

President Luiz Inacio Lula da Silva had forecast that employers would add 150,000 new jobs.

Petroleo Brasileiro SA, Brazil’s state-controlled oil producer, last month began awarding contracts for 28 new drilling rigs as it prepares to tap offshore oil fields in the so-called pre-salt region. Construction of the new oil rigs will generate more than 40,000 jobs, Petrobras said.

Hiring Plans

Daimler AG’s Mercedes-Benz do Brasil on Sept. 30 said it’s hiring 800 new employees for truck and bus production at its Sao Bernardo do Campo plant in Sao Paulo.

Daimler also said 350 temporary workers will become full- time employees this month, and that 160 interns will be hired.

Still, industrial output continues to be “restrained by external weakness,” Alfredo Coutino, director for Latin America at Moody’s Economy.com, wrote in a note to clients.

Exports plunged to $13.9 billion last month compared to the $20 billion total posted in September 2008.

Further limiting the pace of recovery, companies have not yet restored investment to pre-crisis levels, Padovani said.

While output of durable goods increased 3.1 percent in August from July, production of capital goods expanded 0.4 percent, the national statistics agency said. On an annual basis, output of machinery and equipments plunged 22.3 percent.

Brazilian central bank President Henrique Meirelles on Sept. 15 urged companies to resume investment so that faster economic growth doesn’t lead to “macroeconomic imbalances.”

“Companies will step up investment by yearend,” Padovani said.

To contact the reporters on this story: Adriana Brasileiro in Rio de Janeiro at abrasileiro@bloomberg.net; Andre Soliani in Brasilia at o asoliani@bloomberg.net;

Last Updated: October 2, 2009 11:09 EDT