Economy contracted 1.7 per cent in the second quarter

"There is still no light at the end of the tunnel", said Luciano Rostagno, chief strategist at Banco Mizuho in Sao Paulo. The country's gross domestic product contracted 1.7 percent in the three months through September, exceeding the average estimate for a 1.2 percent decline among analysts surveyed by Bloomberg.

The drop in GDP in the third quarter was led by a 1.5 percent fall in consumer spending, which had been one of the main engines of Brazil's economy for years, the IBGE said. Output from the services and industrial sectors also fell sequentially for the fourth- and sixth-straight quarters, the longest slumps on record.

The statistics agency revised its figures for the second quarter, showing a contraction of 3.0% from a year earlier, from the previously reported figure of 2.6%.

Her government is also entangled in a massive corruption scandal. Delcídio do Amaral, the government's leader in the Upper House and, investment bank BTG Pactual CEO André Esteves, were arrested last week accused of attempting to obstruct the Petrobras investigation. GDP shrank 4.5% from the third quarter of 2014.

Much of the slowdown can be pinned on a political crisis that has stalled the passage of economic reform proposals in Congress. President Dilma Rousseff has grown increasingly unpopular, with approval ratings of about 10% in recent polls, making it harder for her to convince lawmakers to support austerity measures. Investments decreased 4% and exports dropped 1.8%.

Pressured by a tumbling currency and regulated price increases, accelerating inflation is likely to force Brazil's central bank to raise interest rates again from a nine-year high in January, according to traders.

Brazilian financial stocks rallied as the Ibovespa swung between gains and losses after a report showed Latin America's biggest economy contracted more than forecast. Economists had expected only a 1.2% decrease.