RIO DE JANEIRO, Brazil (Bloomberg) -- Brazil’s broadest measure of inflation fell more than expected in December, heightening expectations policy makers will cut interest rates next month in an effort to loosen credit.

Consumer, construction and wholesale prices, as measured by the IGP-M price index, fell 0.13 percent in December, the Rio de Janeiro-based Getulio Vargas Foundation said on Tuesday. That was more than all but one estimate in a Bloomberg survey of 13 analysts, whose median forecast was for a 0.05 percent decline. It was the biggest monthly drop since a 0.32 percent decrease in August. The index rose 0.38 percent last month.
Policy makers discussed cutting rates at the bank board’s meeting this month before opting to keep the so-called Selic unchanged at a two-year high of 13.75 percent, according to the minutes of their Dec. 10 meeting. Brazil’s slowing economy is restraining the inflationary pressure stemming from the currency’s 30 percent slide since September, the biggest drop among the 16 most-traded currencies against the dollar.
“Tuesday’s number points to a deflationary scenario in the coming months,” said Jankiel Santos, chief economist at Banco Espirtio Santo de Investimento SA. “The current economic environment won’t allow manufacturers to raise prices significantly.”
------------ Expected cuts
Santos expects the central bank to cut interest rates by 50 basis points when they meet Jan. 20. Morgan Stanley in a Dec. 15 report said policy makers may cut rates as soon as January to “cushion” Brazil from the global credit crisis, which it forecasts will plunge the economy into a technical recession for the first time since 2003.
Central bank President Henrique Meirelles told President Luiz Inacio Lula da Silva the benchmark interest rate will be cut in January, Folha de S. Paulo newspaper reported on Monday, without saying where it got the information.
The so-called Selic rate is expected to end 2009 at 12 percent, according a Dec. 26 central bank survey of 100 economists published Tuesday. The same survey forecasts inflation ending 2009 at 5 percent, down from 5.02 percent a week earlier.
The central bank, in its quarterly inflation report last week, said it expects 2008 to end with annual inflation at 6.2 percent. The rate will probably fall to 4.7 percent next year on tighter credit and weaker demand for Brazil’s commodity exports. In November, the government’s benchmark inflation index fell to 6.39 percent, just within its target range of 2.5 percent to 6.5 percent.
A 0.48 percent decline in the price of industrial components, compared to a 0.75 percent increase last month, helped push wholesale prices down 0.42 percent in December. Annual inflation as measured by the IGP-M slowed to 9.81 percent, its lowest level since April.
The yield on the overnight futures contract for January 2010 delivery rose seven basis points to 12.35 percent. The currency fell 1.3 percent to 2.3979 per dollar.