UPDATE 2-Brazil's economic activity shows weaker-than-expected performance in August

(Adds comment from economist in paragraphs 4-5)

BRASILIA, Oct 20 (Reuters) - The Brazilian economy revealed a contraction in August exceeding market expectations, as government officials have been warning of a significant slowdown in the third quarter.

The IBC-Br index, a key predictor of gross domestic product (GDP), saw a seasonally adjusted 0.77% decline in August from July, deviating from the 0.3% drop projected by economists surveyed by Reuters.

On a non-seasonally adjusted basis, the IBC-Br expanded by 1.28% compared to August 2022 and posted a 2.82% growth over the 12-month period.

Rafaela Vitoria, chief economist at Banco Inter, said that the outcome reflects a deceleration affected by the services sector drop in the month, aligning with expectations of a negative GDP in the third quarter.

Despite the central bank having kicked off an easing cycle in August, which has so far reduced the benchmark interest rate to 12.75%, she pointed out that the rate remains high, especially in the context of lower inflation, reinforcing a credit-constrained environment.

In an interview with Reuters earlier this week, Finance Minister Fernando Haddad emphasized a "very poor" third quarter due to high borrowing costs and declining commodity prices compared to the same period last year, factors impacting corporate performance and, consequently, tax revenue.

Still, the Finance Ministry estimates a 3.2% GDP growth this year after a robust first half performance, primarily driven by a thriving agricultural sector.

The Brazilian economy has benefited from the strength of the agribusiness and extractive industries, complemented by measures implemented by President Luiz Inacio Lula da Silva's government to boost household disposable income, thereby bolstering domestic demand. (Reporting by Marcela Ayres; Editing by Steven Grattan)