Brazil economic activity index up more than expected in September

SAO PAULO (Reuters) - Economic activity in Brazil expanded at more quickly than expected in September, central bank data showed on Monday, rebounding from the prior month's contraction and reinforcing the outlook for a gradual recovery.

Activity rose 0.40 percent from August after seasonal adjustments, following an upwardly revised 0.37 percent decline the month before. The median forecast in a Reuters poll had indicated a 0.34 percent monthly increase in September.

The report follows strong retail figures last week and suggests the outlook for a gradual rebound from the deepest recession in over 100 years remains intact, as low interest rates, falling unemployment and slow inflation drive consumer spending.

It should also dispel fears that a government measure authorizing workers to withdraw early from a severance fund that expired in July may have accounted for a substantial share of strong second-quarter growth.

The upswing in economic activity is unlikely to stoke inflation, however, as firms continue to grapple with idle capacity and employment gains concentrate on off-the-books jobs.

That should grant the central bank wide space to cut the benchmark Selic interest rate to an all-time low at its December meeting, as is widely expected by economists.

(Reporting by Bruno Federowski, additional reporting by Jake Spring; Editing by Robin Pomeroy)