UPDATE 2-Brazil's industrial output misses forecast in February with surprising drop

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SAO PAULO/RIO DE JANEIRO, April 3 (Reuters) - Brazil's industrial production posted in February a slight drop from the previous month, data from statistics agency IBGE showed on Wednesday, a worse-than-expected performance that confirm a negative start to the year for the sector.

Output was down 0.3% in February from January, IBGE said, its second consecutive monthly fall, driven by the decline in intermediate goods production. Economists polled by Reuters expected a 0.3% increase.

The figures reinforce a negative tone for Brazil's industry in early 2024, with output declining by a total 1.8% in the first two months of the year.

"These two drops send a warning sign to the industry", IBGE's research manager Andre Macedo said. "Improvements in the economic environment and the domestic market were still not enough to place Brazil's industry at a positive level."

A drop in the output of chemical and pharmaceutical goods and falling extractive activities weighed on the overall industrial production index in February, according to IBGE, helping drag it down even as three of the four major groups surveyed by the agency posted growth.

"The composition of the report was stronger than the headline figure", the head of the Latin America economic research team at Goldman Sachs, Alberto Ramos, wrote in a report.

He added, though, that "going forward, the industrial sector is expected to continue to face headwinds from the tight financial conditions (high real rates), exigent credit conditions, and soft external demand."

The recent downward trend in Brazil's industry comes after an expansion between August and December, which helped the sector end 2023 on a positive note after stuttering for most of last year due to high borrowing costs.

Brazil's central bank last month cut its benchmark interest rate by 50 basis points for the sixth consecutive meeting to 10.75%, but signaled that it may weigh more modest cuts in the future.

Production in February grew 5.0% from a year earlier , according to IBGE, the seventh increase in a roll but below the forecast of a 5.6% increase in a Reuters poll. (Reporting by Andre Romani in Sao Paulo and Rodrigo Viga Gaier in Rio de Janeiro, Editing by Franklin Paul)