Headline inflation in the Philippines has dropped to its lowest level in over five years, prompting expectations from both local and international financial institutions that the Bangko Sentral ng Pilipinas (BSP) will reduce key interest rates.

Anticipations suggest a cumulative reduction of 75 basis points (bps) by the end of the year, with the first cut likely to occur during the upcoming policy meeting in June.

According to recent data from the Philippine Statistics Authority (PSA), inflation slowed to 1.5 percent in April, down from the 1.8 percent recorded in March.

This marks the most modest inflation rate since November 2019, when it recorded at 1.2 percent, prior to the disruptions caused by the Covid-19 pandemic.

April's inflation figure is significantly below the government's target range of two to four percent but remains within the BSP's forecast range of 1.3 to 2.1 percent.

Deepali Bhargava, head of Asia-Pacific regional research at ING, noted that expectations for continued interest rate reductions are bolstered by the stronger local currency and high real interest rates, alongside prevailing uncertainties regarding global economic growth.

ING has subsequently revised its inflation outlook for the year down from a previous estimate of 2.8 percent to 2.4 percent, citing lower-than-anticipated inflation readings in the first quarter, a notable decline in oil prices, and a robust local currency.

HSBC economist Aris Dacanay remarked that the weak inflation data represents positive news for the Philippine economy, particularly amid concerns over global trade and economic activity.

Following the sustained decline in inflation, ING updated its forecast, predicting that the policy rate could fall to 4.75 percent by the end of 2023, having previously been set at 5.5 percent following a cut from 5.75 percent in April.

The BSP's strategy to ease monetary policy is aimed at safeguarding local GDP growth from challenges posed by the external economic environment, particularly the risks associated with global trade tensions, including tariffs imposed by the United States on various trading partners, impacting Philippine exports.

Dacanay indicated that low inflation could enable the BSP to adjust monetary policy further to stimulate domestic economic activity.

He posited that if inflation continues to surprise on the downside, the BSP may consider introducing up to three quarter-point cuts before the end of the year.

Similarly, economists from Rizal Commercial Banking Corporation (RCBC) predict that a quarter-point cut is likely as early as June, emphasizing the sluggish performance of the Philippine economy in recent quarters as a catalyst for potential monetary easing.

As further developments in the global trade landscape unfold, analysts point out that the next policy meeting in June will be crucial in determining the BSP's monetary policy approach moving forward.