Philippines July CPI: Inflation remains at multi year lows

July inflation remains close to multi-year lows. Inflation is at its lowest level since the 1987, and despite poor weather conditions, overall price pressures remain muted. The drop in commodity prices, particularly crude oil, remains a strong tailwind for activity, as it has lowered inflation considerably. Even in today's print, lower inflation was largely on the back of falling energy prices, and a high base for food inflation. Food inflation stands at 1.3% y/y, even with El Nino type weather conditions persisting. Core CPI, however, remained steady, coming in at 1.9% y/y.

Low inflation will not necessarily lead BSP to ease policy conditions. With growth activity levels stable, the BSP is comfortable with the policy stance. While recent comments from the central bank indicate a calibrated approach to lower inflation prints, currency stability and an expected rate hike by the Fed will keep rates stable for the time being. 

"We see outside risks of easing in the reserve requirement ratio for banks, if liquidity conditions deteriorate due to capital outflows on the back of potential US rate hikes," notes Barclays.

Weather risks are persisting. While near-term inflationary pressures look manageable, drier-than-normal weather conditions could affect agriculture production, which may risk stoking inflation. There are already signs that rice planting in the Philippines has been affected by weather, which could trigger higher imports. 

"We continue to think it is unlikely that BSP will join other central banks in easing monetary policy. We forecast the next policy move will be a hike, most likely in Q4 15, after the Fed has begun its expected tightening. Risks to our rate hike view are biased towards the move being pushed out," added Barclays.