MANILA - Philippine annual inflation eased to an 18-month low of 3.3 percent in May, below market estimates, and the central bank said the data provides scope to cut interest rates further.

With food and fuel price pressures easing, some economists say domestic inflation could fall to zero and the consumer price index (CPI) could even start falling in the third quarter.

That could give the central bank room to slash its benchmark overnight borrowing rate to as low as 3 percent although most see one more rate cut taking the policy rate to 4 percent from its 4.25 percent, already a 17-year low.

Annual inflation in May slowed sharply from 4.8 percent in April and brought the average for the first five months of the year to 5.7 percent, the National Statistics Office announced on Friday.

"The scope for further monetary easing therefore continues, but tempered only by the need to ensure liquidity does not become excessive," central bank governor Amando Tetangco said in a text message to reporters.

That view runs counter to some other central banks in Asia, including those in South Korea, Malaysia and Thailand, which have hit the pause button after heavy rate cuts to counter the global economic downturn.

Economists in a Reuters had expected annual inflation last month to come in at 3.7 percent. The central bank had forecast a range of 3.3 percent to 4.2 percent.

The rapid slowdown in inflation is in line with a global trend although some analysts say the rapid deceleration in the Philippines may be partly due to a firmer peso , which has risen almost 3 percent since early March.

Still, HSBC economist Frederic Neumann said "deflation appears very unlikely."

"We should see an acceleration of CPI towards the end of the year, in part because oil prices have started to rise again," Neumann added.

With many central bankers nearing the end of their easing cycle, analysts believe it is unlikely Philippine monetary authorities will drop its policy rates below 4 percent.

But economist Simon Wong at Standard Chartered Bank believes the Philippines' benchmark rate will be cut to 3 percent by the end of the third quarter with inflation hitting around zero "or even slightly negative levels".

"We'll see a lot more room for the central bank to ease interest rates going forward, which we expect will be cut to 3 percent by end of the third quarter," he said.

The central bank has slashed interest rates by a total 175 basis points since December to lift the Philippine economy, which contracted at its fastest pace in two decades in the first quarter from the last three months of 2008.

The central bank's policy-making monetary board meets next on July 9.