Sept. 2 (Bloomberg) -- Brazil's industrial production expanded faster than forecast by economists in July, cementing expectations that the central bank will raise interest rates further next week.

Output rose 8.5 percent from a year ago, more than the revised 6.4 percent increase in June and more than the 8 percent median forecast in a Bloomberg survey of 32 economists. After stripping out seasonal factors, output rose 1 percent from June, the statistics agency said in a statement in Rio de Janeiro.

Today's report highlights the sustained domestic demand that is powering growth and consumer price increases in Latin America's largest economy. Policy makers next week will probably vote to raise Brazil's benchmark lending rate by three-quarters of a percentage point for a second time in as many meetings to slow inflation from a three-year high, Alexandre Lintz, chief strategist with BNP Paribas in Sao Paulo, said.

``We see no room for the central bank to change its current tightening stance, given economic activity remains robust,'' Lintz said. ``The bank needs to keep raising rates by 0.75 percentage point until there are clear signs that growth is slowing.''

Inflation, running above the midpoint of the central bank's target range of 2.5 percent to 6.5 percent since January, fell in July for a second month, led by food. August inflation figures will be released on Sept 5. Consumer prices rose 6.37 percent in the 12 months to the end of July.

Car Sales

Sales of new cars surged 32 percent in July versus the same period a year ago, to a monthly record of 288,137 vehicles. Retail sales have jumped more than 10 percent in four of the first six months of the year.

The central bank unexpectedly quickened the pace of rate increases last month by lifting the benchmark rate to 13 percent from 12.25 percent after half-point increases in the two previous meetings.

Policy makers will raise interest rates to 14.75 percent by the end of the year, according to the central bank's most recent weekly survey of economists.

Brazil's real weakened 0.6 percent to 1.6596 per dollar at 9:31 a.m. New York time from 1.6497 per dollar late yesterday.

To contact the reporter on this story: Joshua Goodman in Rio de Janeiro jgoodman19@bloomberg.net

Last Updated: September 2, 2008 09:33 EDT