• Political crisis drags on, hampering recovery measures
  • Fitch cut credit rating to one notch above junk on Thursday

Brazil’s economy in August shrank more than forecast as the central bank maintains rates at a nine-year high to combat above-target inflation.

The economic activity seasonally adjusted index, a proxy for gross domestic product, fell 0.76 percent in August from the prior month after a revised 0.01 percent fall in July, the central bank said Friday. The median estimate from 30 economists surveyed by Bloomberg was for a tumble of 0.61 percent. The non-seasonally adjusted economic index fell 4.47 percent from a year ago, compared with a median estimate of a 4.23 percent drop.

Brazil’s economic outlook has worsened as a political crisis drags on and the country suffers consecutive credit rating downgrades that threaten investments. Economists see Brazil heading for the first two-year skid in gross domestic product since the Great Depression, even as inflation this year is running at more than double the government-set target.

Fitch Ratings downgraded Brazil’s sovereign credit rating to one level above junk on Thursday, with a negative outlook. That is the second downgrade in little over a month as Standard & Poor’s cut Latin America’s largest economy below investment grade status on Sept. 9.

Economists surveyed by the central bank see Brazil’s GDP dropping almost 3 percent this year and 1.2 percent in 2016. They also forecast inflation of 9.7 percent this year and 6.05 in 2016. The government target is 4.5 percent, plus or minus two percentage points.

The central bank held Brazil’s key rate at 14.25 percent on Sept. 2 after increasing it by 3.25 points. Central bank President Alexandre Tombini said on Sept. 24 that keeping rates at that level for a prolonged period is necessary to slow inflation to the target by the end of 2016.

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