INTEREST rate cuts will likely only start in the fourth quarter with inflation still to settle firmly within target, the research arm of banking giant HSBC said.

"The easing cycle may be delayed, but we don't think there will be any rate hikes ahead with nonmonetary policies at work," HSBC Global Research economist Aris Dacanay said in a report on Thursday.

HSBC, which earlier said the Bangko Sentral ng Pilipinas (BSP) could start easing policy via a 25-basis-point cut in the third quarter, now expects this to be implemented in the last three months of the year.

The BSP policy rate, currently at a near 17-year high of 6.5 percent, could potentially drop to 5.0 percent by the end of 2025, Dacanay said.

Surging inflation had prompted monetary authorities to raise key interest rates by a total of 450 basis points (bps) beginning May 2022, the last an off-cycle 25-bps hike in October last year as consumer prices spiked after slowing for several months.

Inflation, which peaked at a 14-year high of 8.7 percent in January 2023, has since returned to the 2.0- to 4.0-percent target. It has risen for the last two months, however, and is expected to top 4.0 percent anew in the second quarter.

Still, HSBC said that further tightening was unlikely as current inflation risks can be handled via nonmonetary measures.

"We ... downplay the risk of further rate hikes. Although inflation risks have emerged in the form of high oil and rice prices, these risks are supply-side in nature," Dacanay said.

He noted that Malacañang had recently issued Administrative Order 20 to ease the importation of agricultural products.

Rate cuts, meanwhile, will help support the peso and can be easily implemented given still-strong economic growth.

Dacanay noted that the job market was continuing to perform well and that credit growth was also picking up.

"The recent depreciation of the Philippine peso should also help support the consumption of households with overseas workers as the purchasing power of each US dollar remitted increases," he added.

Stubborn inflation and high interest rates resulted in economic growth of 5.6 percent last year, below the 6.0- to 7.0 percent target. The government, which earlier targeted 6.5- to 7.5-percent growth for 2024, last month lowered the goal to 6.0 to 7.0 percent.