March 12 (Bloomberg) -- Brazil's economy expanded a greater-than-expected 6.2 percent in the fourth quarter, the fastest year-on-year quarterly expansion since June 2004, as consumer spending and business investment swelled.

Gross domestic product rose more than the median 5.6 percent forecast in a Bloomberg survey of 31 analysts. The economy expanded 5.4 percent last year, the fastest pace since 2004, the government said.

Latin America's biggest economy expanded for a 24th straight quarter as record low interest rates and wage growth that outstripped inflation powered consumer and business spending. Unless the expansion slows in coming months, policy makers may need to raise interest rates to rein in consumer prices, said Goldman Sachs Group Inc. economist Paulo Leme.

``The current acceleration in household consumption is unsustainable and confirms our view that at some point the bank will have to act to temper the economy's brisk expansion,'' Miami-based Leme said in an interview with Bloomberg Television today. Leme said he expects the Banco Central do Brasil to raise its overnight lending rate as early as April.

Easing, Investment

Brazil's central bank over the two years through September lowered the benchmark lending rate 18 straight times from 19.75 percent to 11.25 percent, the longest easing cycle since the so- called Selic was adopted in 1999.

Those rate cuts, while fueling investment and output in the $1.1 billion economy, have also stoked annual inflation, which quickened to 4.61 percent last month from an eight-year low of 2.96 percent in March 2007.

As a result, household consumption, a measure of personal spending, grew 8.6 percent in the quarter, the fastest pace since the three months ended December1996, according to government data.

Brazilian bank lending rose 27.3 percent to 932.3 billion reais ($552.9 billion) last year, the biggest annual increase since 1995, according to data compiled by Bloomberg, while personal lending rose 33 percent and loans to companies rose 29.8 percent.

Gross fixed-capital formation, a gauge of corporate investment in factories and machinery, posted growth of 16 percent in the last quarter, the fastest pace in almost 13 years.

Raise Case

Brazilian companies enjoyed record-low borrowing costs for most of the past 1 1/2 years amid the central bank's easing cycle, helping fuel last year's expansion, said Ailton Braga Domingues, head of capital markets for Banco Fator SA.

``This shows that economic growth was still gathering momentum at the end of the year,'' said Marcelo Kfoury, chief Brazil economist for Citigroup Inc. in Sao Paulo, who assigned a 60 percent probability to a central bank interest rate increase as early as June.

The yield on the inter-bank deposit contract for Jan. 2, 2009, delivery, the most traded interest-rate futures contract in Sao Paulo today, jumped 7 basis points to a one-month high of 12.03 percent today from 11.96 percent yesterday.

The yield, a bet among investors on the level of interest rates at the end of the year, closed at 12.02 percent.

One basis point equals 0.01 percentage point.

`Robust Pace'

The $1.1 trillion economy expanded 1.6 percent from the third quarter, slower than the revised 1.8 percent pace in the third quarter, according to the Rio de Janeiro-based statistics agency.

That expansion was faster than the 1.4 percent forecast in a Bloomberg survey of 25 economists.

Finance Minister Guido Mantega, speaking in Brasilia, said that the economy was growing ``at a robust pace and free of inflation, something new in Brazil.'' He said further revisions in the coming months may show the expansion to be stronger, without elaborating.

The central bank tomorrow publishes its minutes of the March 4-5 policy meeting where policy makers left the overnight rate unchanged. Policy makers will probably say that the expansion straining factory capacity and may translate into quicker inflation, Leme said.

The bank targets 4.5 percent inflation this year and next.

The services industry, a measure of consumer spending that accounts for about 60 percent of the economy, helped lead growth higher in the quarter after posting growth of 5.3 percent from the same period a year earlier. Manufacturing, powered by investment, rose 4.3 percent.

Agriculture, which accounts for less than 10 percent of GDP, soared 8.6 percent last quarter.

For growth to be sustained, the government must reduce spending and the national debt while increasing investment on education and infrastructure, Arminio Fraga, a former central bank president and a partner of Gavea Investimentos Ltda. in Rio de Janeiro, said in Rio de Janeiro on March 7.

Third-quarter growth, on a year-on-year basis, was revised down to 5.6 percent from 5.7 percent.

To contact the reporter on this story: Guillermo Parra-Bernal in Brasilia at gparra@bloomberg.net

Last Updated: March 12, 2008 14:54 EDT