March 26 (Bloomberg) -- Brazil’s unemployment rate rose to a 10-month high as the economy’s biggest economic contraction on record prompted companies to cut output and staffing.

Unemployment in Brazil’s six largest metropolitan areas rose to 8.5 percent in February from 8.2 percent in the previous month, the national statistic agency said today in a report distributed in Rio de Janeiro. The rate was lower than forecast by all but one of the 27 economists surveyed by Bloomberg.

Latin America’s biggest economy shrank by the most in at least a decade in the fourth quarter of 2008 and banks such as Morgan Stanley and BNP Paribas SA forecast a contraction in 2009 as the first global recession since World War II takes hold. The economy shed a record 788,336 government-registered jobs since November, according to the Labor Ministry.

“The rate shows the Brazilian economy is still slowing, but now at a smoother pace,” Roberto Padovani, chief economist at Banco WestLB in Sao Paulo, said in a telephone interview. “Unemployment will continue to rise in the next two months.”

Gross domestic product fell 3.6 percent in the fourth quarter from the previous three-month period, the biggest quarterly contraction since the series started in 1996.

Latin America’s biggest economy may contract 4.5 percent in 2009, according to Morgan Stanley. Padovani expects Brazil’s economy to shrink 0.2 percent this year.

In a bid to boost employment, President Luiz Inacio Lula da Silva plans to spend ($15.2 billion) to boost homebuilding, a program that can create 1.5 million jobs, Finance Minister Guido Mantega said.

Slower economic growth has helped rein in consumer prices, giving policy makers room to cut the benchmark interest rate in a bid to prevent a deeper recession.

Monthly inflation decelerated to a two-year low in the 30 days through mid-March, according to a national statistic agency report released yesterday.

Economists expect the central bank to slash the so-called Selic rate for a third straight time to a record low 10.25 percent next month, according a March 20 central bank survey.

The yield on the overnight-rate futures contract for January 2010 delivery, the most-actively traded on the BM&F commodity and futures exchange in Sao Paulo, declined eight basis points to 9.72 percent at 10:10 a.m. New York time from 9.80 percent yesterday.

To contact the reporter on this story: Andre Soliani in Brasilia at asoliani@bloomberg.net; Diana Kinch in Rio de Janeiro at dkinch1@bloomberg.net

Last Updated: March 26, 2009 10:35 EDT