Philippines’ January inflation moderates, likely to remain in BSP’s target range over 2016-2017

Inflation in the Philippines moderated to 1.3% in January from 1.5% in December, on par with Barclays and consensus expectations. Food inflation is expected to have remained below the central bank's target range of 2%-4% as energy prices depressed the overall headline inflation. Core CPI inflation reached 1.8% y/y in January, led by higher housing rentals, public transport costs and healthcare.

"We believe underlying inflation remains in check in the Philippines, and CPI inflation should remain anchored in the BSP's 2-4% target band over 2016-17. We continue to see the near-term upside risks to inflation as centred on El Niño and its potential impact on agricultural prices, as dry weather conditions have strengthened in recent weeks", says Barclays.

The downside risks to the projections are expected to come from further drop in oil prices, resulting in lower retail pump prices and electricity tariffs.

The BSP is expected to hold its policy rates despite the recent acceleration in headline inflation, highlighting that inflation and growth risks stem majorly from weak weather and uncertain global backdrop. BSP Governor Tetangco, post the release of the CPI data, said that inflation faces upside risks from weather conditions, but continues to be largely contained.

"We continue to expect BSP's next policy move to be a hike, though we see only see a first hike coming in Q2 2017. We think the central bank is likely to hike when growth has recovered sufficiently and inflation is high enough to justify an increase in interest rates", says Barclays.

Even if the Philippines faces the threat of external uncertainty in the form of US Fed rate rise cycle, the nation's low level of short-term debt and strong external position gives the central bank sufficient space to continue with an accommodative policy even if the US hikes rates higher.