(Bloomberg) -- The Philippine central bank shifted to a smaller interest-rate increase and cut inflation forecasts, signaling it may be at the tail end of its most aggressive monetary tightening in two decades.

Bangko Sentral ng Pilipinas raised the overnight reverse repurchase rate by 25 basis points to 6.25% on Thursday, as seen by all but one of 22 analysts in a Bloomberg survey. One predicted a pause. That brings the cumulative increases since May to 425 basis points including four half-point and two 75 basis-point actions. The rate is at the highest since May 2007.

“Our action will be almost completely driven by our outlook on inflation,” Governor Felipe Medalla said in a briefing. “In the absence of new shocks, we think we are already moving in the right direction,” he said, adding that if prices decline on a month-on-month basis, “then we might actually not increase next meeting.” The price index in February was unchanged from January.

The monetary authority’s latest estimates are showing signs of easing price pressures while the economy remains resilient.

Medalla allayed fears of significant impact from global banking woes and said that gross domestic product will probably grow almost 7% this quarter. BSP cut average inflation forecasts this year and next to 6% and 2.9% compared to last month’s projections.

That provides monetary authorities the space not only to downshift, but also to consider a pause amid increasing uncertainties in the global economy.

Although BSP’s quarter-point increase Thursday came hours after the Federal Reserve moved by a similar magnitude, Chair Jerome Powell’s commitment to stay the course on tightening doesn’t mean BSP has to do the same. 

While the Fed’s actions are relevant, they’re not the main factor that the Philippine central bank has to consider, Medalla said.

What Bloomberg Economics Says...

“Going forward, we don’t think much more tightening will be needed – at most another 25-bp hike at its next meeting in May, if any. By then, inflation and price risks could well be clearly decelerating — providing scope for a rate hold.”

–Tamara Mast Henderson, Asean economist

For the full note, click here

The peso, which has emerged the strongest among the most-active currencies in Asia so far this year, extended gains after the decision and closed 0.4% higher against the dollar. The main stock index was 0.2% down at close, before the announcement.

For now, the rate increase makes Philippines one of the last bastions of tightening in Southeast Asia, where some have already shifted to pause. Vietnam went a step further to reduce a key rate to support economic activity.

“Barring any fresh supply side shocks, such as the potential emergence of African Swine Fever, we believe that BSP will be open to shifting to a pause at their May meeting,” said Nicholas Mapa, an economist at ING Groep NV. “If inflation sustains its downward trajectory, the BSP may even opt to lower the reserve requirement ratio.”

--With assistance from Clarissa Batino, Cecilia Yap, Tomoko Sato and Karl Lester M. Yap.

(Updates with governor’s comments in third paragraph, price and growth estimates from fourth paragraph.)

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