With headline inflation falling to its lowest level in over five years, local and international financial institutions now expect the Bangko Sentral ng Pilipinas (BSP) to cut key interest rates by a total of 75 basis points (bps) by year-end, with the first reduction likely as early as the upcoming policy meeting in June.

“The odds that the Philippine central bank will continue to cut rates are rising amid lower-than-expected inflation,” said the Netherlands-based financial giant ING in its commentary released on Tuesday, May 6.

ING Asia-Pacific regional research head Deepali Bhargava said that the heightened expectations of continued interest rate reduction are also supported by “a stronger-than-expected local currency and high real rates, combined with uncertainty about global growth.”

According to the Philippine Statistics Authority (PSA), the country’s inflation slowed further from the 1.8 percent recorded in March. Exceeding March’s almost five-year-low rate, April’s inflation rate marks the slowest since November 2019’s 1.2-percent rate, before the Covid-19 pandemic disturbed the country.

April’s figure fell significantly below the government’s target band of two to four percent, but within the BSP’s forecast range of 1.3 to 2.1 percent. Contrary to the BSP’s lower expectations, Bhargava had anticipated April inflation to tick up to 1.9 percent.

Last month’s figure brought the average rate for the first four months to two percent, comfortably within the government’s target band of two to four percent.

Considering the latest consumer price developments, Bhargava said ING is revising its inflation outlook for the year, trimming its previous expectation of a 2.8-percent full-year rate down to 2.4 percent.

Bhargava said this revision stemmed from “lower-than-expected readings in the first quarter, a significant drop in oil prices, and a sharp appreciation in the local currency.”

Likewise, HSBC ASEAN economist Aris Dacanay said in a separate commentary that, “all in all, the weak inflation print is good news for the Philippine economy at a time when uncertainty looms over the outlook of trade and the global economy.”

Deeper rate slashes

Given the continued decline in the country’s inflation rate, ING has added one more rate cut in its full-year outlook.

“We now expect the policy rate to reach 4.75 percent by the end of the year,” said Bhargava. The BSP resumed its policy easing in April when it trimmed the key borrowing costs to 5.5 percent from 5.75 percent.

The central bank cited the need to shield local gross domestic product (GDP) growth from the threat of the “more challenging external environment.” It earlier noted that inflationary risks that linger include escalating global trade tensions centered on reciprocal tariffs imposed by the United States (US) on its trading partners, including a 17-percent tariff on Philippine exports.

Low inflation, Dacanay said, will give the BSP “room to ease monetary policy even further to help crank the domestic economy through credit.”

Other than the inflation trend, Bhargava asserted that a stronger peso, coupled with global growth uncertainty, “reinforce” ING’s view that monetary policy easing by the central bank is “far from over.”

“Much of the tariff story will continue to unfold before the next policy meeting in June. Fresh threats to global growth and a modest inflation reading for May would keep considerations of a June cut alive,” Bhargava said.

Even Dacanay has considered the likelihood of the BSP “cutting its policy rate earlier and, perhaps, by more,” or a total of three quarter-point cuts by the end of the year, considering “how much inflation has been surprising to the downside.”

Dacanay said earlier that HSBC’s baseline scenario is for the BSP to trim the key interest rate to five percent by year-end, noting that the central bank will skip cutting in June.

Rizal Commercial Banking Corp. (RCBC) chief economist Michael Ricafort also forecast a quarter-point cut likely to be carried out as early as June. He further noted that the lackluster performance of the Philippine economy in recent quarters would prompt the BSP to slash the rate by at least another 50 bps.