Risks biased towards BSP's easing first, then tightening

The BSP has room to ease policy rates near-term, at the June and/or August monetary policy meetings. The central bank's bias may shift towards tightening from November, however - particularly if the expected US Fed rate hike causes a bigger market reaction than expected and if oil prices rebound strongly towards the USD 80-90/bbl range. However, only a c.30% likelihood of a rate cut is seen at the June and August meetings. No change to the SDA policy rate for the rest of 2015 and 2016 is expected.

"The central case is for low inflation of 1.9% and 2.9% for 2015 and 2016, respectively, and inflation is expected to average 1.3% y/y in Q3-2015 before rebounding to 2% in Q4. Inflationary pressure seems to be muted near-term after inflation eased to 1.6% y/y in May", says Standard Chartered.

The following external factors are driving BSP's rationale against near-term rate cuts, in our view: (1) eventual US interest rate hikes, (2) upside risk to food inflation from El Nino, and (3) a potential recovery in oil prices. 

According to Standard Chartered, "the US is likely to start its policy rate hiking cycle in September. This may be the most dovish rate hike cycle in recent US history, however, given potentially low GDP growth rates. El Nino could cause food inflation to rise in the Philippines, but not by a substantial extent". 

A rise in food inflation could push m/m inflation higher from its YTD average of 0.09%. The food component comprises almost 40% of the total CPI basket. The El Nino impact is likely to peak in Q3 and fade by Q4. However, the base effects are strong and may push y/y inflation to below 2% for the full year. International food prices remain low compared to previous years. 

Analysts expect oil prices to rise by the end of 2015, although limited the near-term upside risk. OPEC maintained its output target at the 5 June meeting. Favourable supply-demand fundamentals for oil continue to provide the BSP room to be neutral or even dovish near-term.