The soft data, with 12-month inflation below this year's official target, may trigger a 50-basis-point rate cut, economists said, instead of the 25-basis-point one that most had initially forecast.

In Latin America's largest economy, the IPCA-15 consumer price index fell 0.07% in the month to mid-July, IBGE said, down from 0.04% in the previous month and below the 0.01% drop estimated by economists polled by Reuters.

That took 12-month inflation in the country to 3.19%, while economists had projected it to come in at 3.26%.

The annual figure remains below the central bank's inflation target of 3.25% for this year, although an uptick is expected from this month because of unfavorable base effects.

Brazil's central bank has conducted one of the world's most aggressive monetary tightening cycles in a bid to fight inflation, adding 1,175 basis points of hikes between March 2021 and August 2022.

With that work largely done, an easing cycle is widely expected to start next month, but economists still diverge on the size of the cut. While some bet on a 25 basis point cut, others forecast a 50-basis-point move.

"Today's numbers suggest that the COPOM will be able to cut rates by 50bp next week," Pantheon Macroeconomics' chief Latin America economist Andres Abadia said. "The inflation picture continues to improve."

IBGE said the deflation in the month to mid-July was mainly driven by lower housing and food and beverage costs, whose declines were partially offset by an increase in transportation prices.

At its last meeting in June, the central bank said that a "parsimonious" rate cut in August was possible if the positive inflation scenario continued, although noting that a minority of its members defended a more cautious approach.

They will regroup on Aug. 1-2 for a new monetary policy decision.

"Today's IPCA-15 does provide grounds for an initial cut of 50 basis points," Inter's chief economist Rafaela Vitoria said. "Even in the view of the most hawkish members of the committee."