Philippine central bank to keep rates on hold on May 16, first cut pushed to Q4

BENGALURU (Reuters) - The Philippine central bank will keep its key policy rate unchanged on Thursday, according to a Reuters poll of economists who now expected the first rate cut to come in the final quarter of this year.

Annual inflation rose for the third straight month in April, to 3.8% from 3.7% in March. While it stayed within the central bank's 2-4% target range, Bangko Sentral ng Pilipinas (BSP) and economists expect risks to remain tilted toward the upside.

That suggests BSP may be reluctant to reduce its interest rate ahead of major central banks, notably the Fed, which is expected to make its first cut in September.

All 23 economists in the May 7-13 Reuters poll forecast the BSP to keep its overnight borrowing rate unchanged at 6.50% on May 16. The survey also rates were expected to stay there at least end-September.

"We expect the pause in rates to be extended at the meeting. Headline CPI inflation prints have been moving higher and are edging closer to 4% - the upper end of the BSP inflation target range," noted Derrick Kam, Asia economist at Morgan Stanley.

"However, the central bank had already taken the recent inflation dynamics into consideration at their last meeting and hence the recent run of data should not be a surprise that would prompt the central bank to hike."

Median forecasts showed interest rates on hold until the end of the third quarter, followed by 50 basis points of cuts in the fourth quarter to end the year at 6.00%.

Among those with end-year forecasts, eight of 18 economists saw the policy rate at 6.00%, three expected rates at 6.25%, three said 5.50% and one said 5.75%. Three predicted no change from 6.50%.

Still, a significant minority, eight of 19 economists, expected the central bank to make the first cut next quarter.

Despite the highest rates since June 2007, the Philippine peso is down about 4% against the U.S. dollar for the year.

"The odds of a rate hike is low even though there is a certain discomfort that the Philippine peso reached close to the 58 PHP/USD psychological threshold in late April... the recent weakening of the peso will also prompt the BSP to keep rates at the current level," wrote Sarah Tan economist at Moody's.

(Reporting by Veronica Dudei Maia Khongwir; Polling by Devayani Sathyan; Editing by Tomasz Janowski)

By Veronica Dudei Maia Khongwir