Philippine's inflation continues to fall, but El Niño risks remain

May inflation came in much weaker than expected, driven by further declines in food and services inflation, and electricity tariff cuts. Weakness was seen particularly in rice, meat & fish, and fruit, which offset a pickup in vegetable prices on the back of dry weather. The fall in core inflation was unexpected, but could reflect passthrough of weaker supply-side cost pressures to some service sectors (particularly food services). Despite the sharp downside surprise, the print was just within the BSP's forecast range for May of 1.6-2.4%, notes Barclays.

Tetangco comments suggest an increased risk of a shift in policy stance. In remarks after the release, BSP governor Tetangco reiterated that inflation expectations were "well anchored" and that he is "watchful of oil prices and El Niño". However, he also said that policymakers would "see if there's a need to adjust policy stance," and importantly, he did not repeat comments made in recent weeks that the current policy stance "remains appropriate". While not our base case, a prolonged period of inflation below target could raise risks of a one-off cut.

El Niño risks remain. While near-term inflationary pressures have eased, there are already signs that drier-than-normal weather conditions are impacting agricultural output, as seen in the rise in vegetable prices. Given the risk of El Niño on food prices this year (see El Niño - A risk worth watching, 18 May 2015), and with growth likely to recover from Q2, analysts assume, it is unlikely the BSP will join other central banks in easing monetary policy. Barclays forecasts the next policy move to be a hike, most likely in Q4 15, after the Fed begins tightening.