The Brazilian economy returned to growth in the first quarter of this year after two years of deep recession.

The central bank's IBC-Br economic activity index, a proxy for monthly GDP, rose 1.12% in 1Q17 from 4Q16, in seasonally adjusted terms. Economic activity in the first quarter was helped by falling inflation and the reduction of the country's key interest rate (the Selic).

"Recent soft (sentiment indicators and PMIs) and hard data give us confidence that after an 11-quarter long recession the economy reached an inflexion point during first quarter," said Alberto Ramos, an economist at Goldman Sachs.

However, the IBC-Br contracted 0.44% in March compared to February, in a sign that the economic recovery remains very fragile.

GDP shrank 3.6% last year, following a contraction of 3.8% in 2015, which eclipsed Brazil's recession during 1930-1931, when GDP contracted 2.1% and 3.3%, respectively, according to statistics bureau IBGE.

Latin America's largest economy was hit by a "perfect storm" in 2015-2016, which included both domestic and external factors, such as a major political crisis, the massive Lava Jato corruption probe, plummeting investor and consumer confidence, and a steep decline in commodity prices.

Local economists that are surveyed monthly by the central bank expect the economy to grow at around 0.5% this year on the back of lower inflation and interest rates, and improving consumer and investor confidence. Passage of an important pension reform is seen as key for stronger confidence among local and international investors.

Brazil's 12-month inflation rate reached 4.08% in April, below the central bank's target of 4.5%, and the Selic is now at 11.25%, 300 basis points below the level seen at the beginning of 4Q16.

With inflation expected to fall further this year, the market forecasts that the central bank will bring the Selic down to single-digit territory by the end of the year.