Bangko Sentral ng Pilipinas remains comfortable with policy stance

BSP kept its policy rate unchanged at 4.00%, and also left SDA rates at 2.50%. 

The BSP did cut its inflation forecasts, with 2015 now expected at 2.1% (previously: 2.3%; Barclays: 2.0%), and 2016 inflation at 2.5%, but the governor flagged near-term upside pressure on inflation from electricity tariffs. While the governor did not mention it at this meeting, analysts also see upside risks to inflation from El Niño, and there have already been signs that this is impacting food production, with shortages pushing up vegetable prices, while the UN's Food and Agricultural Organization recently cut slightly its forecast of domestic rice output to 18.4mn tons from 18.9mn previously, citing lower rainfall leading to a delay in planting.

Overall, despite the recent downtrend in inflation, domestic demand remains firm, and we continue to expect the next policy decision to be a hike. With that said, benign inflation does leave room to keep policy on hold for the time being. 

Barclays expects the next hike to take place in Q4 15, after the Fed begins tightening (our US economists' forecast a September lift-off) and expects market attention to shift rapidly towards next May's presidential election, which is likely to become a bigger focus from Q3.