By Luisa Maria Jacinta C. Jocson, Reporter

THE DOOR is now wide open for the Bangko Sentral ng Pilipinas (BSP) to continue its rate-cutting cycle although at a gradual pace, analysts said.

“With luck coming into play, the door for the BSP to hasten its easing cycle has swung wide open,” HSBC economist for ASEAN (Association of Southeast Asian Nations) Aris D. Dacanay said in a report.

The Monetary Board slashed rates for a second straight meeting on Wednesday with a 25-basis-point (bp) cut, bringing the key rate to 6% from 6.25%.

The BSP has now lowered borrowing costs by a total of 50 bps since it began its easing cycle in August.

“The BSP may continue to cut interest rates in the coming months, although aggressive rate cuts are unlikely due to domestic and external considerations,” Bank of the Philippine Islands (BPI) Lead Economist Emilio S. Neri, Jr. said in a report.

BSP Governor Eli M. Remolona, Jr. said that they prefer to take “baby steps” in adjusting policy rates, referring to quarter-point cuts. He noted that a 50-bp cut may be too aggressive and would only be likely in a hard-landing scenario.

Mr. Remolona also signaled the possibility of 100 bps worth of cuts in 2025. However, he said rate cuts will not necessarily be done at every policy meeting.

“Given that inflation is expected to remain within target over the policy horizon and that economic growth should stay fairly robust, we expect the BSP to continue its gradual easing,” Citi economist for the Philippines Nalin Chutchotitham said.

RATE CUT IN DECEMBER
Analysts expect the BSP to deliver another 25-bp rate cut in December, in line with the central bank’s own signals.

“Given the persistently weak private consumption and improving inflation outlook in the near term, we now think that the BSP will cut its policy rate by 25 bps to 5.75% at its meeting in December 2024,” ANZ Research said in a report.

ING Bank likewise sees a 25-bp cut in December amid expectations of within-target inflation.

“We expect CPI (consumer price index) inflation to average 2.9%, well below the midpoint of the target band in 2024. The Philippines should benefit from improving global food supplies and lower rice prices following India’s lifting of its export ban on rice,” it said.

Mr. Dacanay expects the Monetary Board (MB) to cut by 25 bps at its next four policy meetings.

“We maintain our policy rate forecasts and expect the BSP to cut its policy rate again by 25 bps during the last rate-setting meeting for 2024. We then expect the BSP to cut its policy rate by 25 bps in each of the first three Monetary Board meetings of 2025,” he said.

“This also implies that the easing cycle will likely end in the second quarter of 2025 with the policy rate at 5% — a rate that is higher than pre-pandemic levels and a rate higher than what the BSP mentioned (on Wednesday). This is because we expect growth in 2025 to be strong when lower rice prices significantly boost household consumption.”

Ms. Chutchotitham also expects 25-bp cuts at the MB meeting in December, as well as the meetings in February, May and August next year. This would bring the policy rate to 5% by end-2025.

“We maintain our expectation of an additional 50-bp cut in 2026, to 4.5%. This would bring the policy rate slightly closer (but still a tad higher) to the pre-COVID average long-term policy rate,” she said.

“With the economy in a more ‘Goldilocks’ scenario, the BSP has options to remain flexible in its easing decisions, which may also include consideration of future Fed decisions and impact on the foreign exchange market,” she added.

RISKS
BPI’s Mr. Neri also sees the policy rate ending at 5.75% by end-2024, but warned of risks that could change this outlook.

“However, this outlook may evolve depending on what happens now until then, especially abroad. Recent developments have shown how economic data can surprise the markets and quickly lead to a shift in sentiment,” he said.

Mr. Neri cited risks such as the possibility of a pause by the US Federal Reserve in December, rising global oil prices and peso depreciation.

He said inflation should remain manageable in the next 12 months but warned of potential supply shocks.

“However, upside risks remain, particularly with the possibility of La Niña and the increase in cases of African Swine Fever… Inflation in the Philippines remains sensitive to climate conditions, and another extreme weather event could trigger a spike. On the other hand, stable commodity prices amid China’s economic slowdown may offset these risks,” he said.

Both Citi and BPI expect headline inflation to settle at 3.2% this year, before easing to 2.8% next year.

The BSP chief on Wednesday said the balance of risks to the inflation outlook for next year until 2026 has shifted to the upside.

The BSP trimmed its baseline inflation forecast to 3.1% (from 3.4%) for 2024 but raised the projection to 3.2% (from 3.1%) for 2025 and 3.4% (from 3.2%) for 2026.

Mr. Neri also cautioned the BSP against easing aggressively as the country’s external position is “not as strong as before.”

“(This) makes the peso less resilient to external risks and developments, which could spill over into domestic inflation… Moreover, the outlook for inflation can change quickly given the current global environment and the domestic supply shocks that can easily materialize. A cautious approach to rate cuts might be needed in order to offset these risks and ensure stability in the markets.”

Mr. Neri also flagged the possibility of a pause, though small, if the peso continued to be under pressure.

THE BUSINESS PROCESS OUTSOURCING (BPO) industry in the Philippines is likely to shrink as the shift to artificial intelligence (AI) in the workplace accelerates, Fitch Solutions’ unit BMI said.

“In the case of the Philippines, BPO is a key source of foreign currency, and this vital sector will probably shrink as AI adoption ramps up, since it would allow firms to reshore call centers to even developed economies cost effectively,” BMI Head of Asia Country Risk Darren Tay said in a webinar on Thursday.

“Put bluntly, AI could invalidate the Philippines’ current economic strategy,” he added.

The Contact Center Association of the Philippines (CCAP) expects contact center and BPO industries’ revenue to jump by 9% to $32.16 billion this year.

In 2023, CCAP members’ revenue stood at $29.5 billion, accounting for the bulk or 83% of the $35.5-billion revenue posted by the Information Technology and Business Process Management (IT-BPM) industry.

BMI said the Philippines is also among the countries that are less likely to benefit from the transition to AI.

According to BMI, lower-income countries are “much slower to adopt AI at a meaningful scale and the developmental gap between these countries and the rest in Asia will probably widen.”

“The Philippines, Indonesia and Thailand are in a worse position compared with the high-income group,” Mr. Tay said.

A quarter of these countries’ workforces are involved in high exposure and low complementarity jobs, such as elementary sales positions, he said.

“And they have a much smaller proportion of workers that are in high complementarity jobs, leaving them less able to benefit from AI-driven productivity gains” he added.

In 2023, the Philippines ranked 65^th out of 193 countries in the Government AI Readiness Index by Oxford Insights.

The National Economic and Development Authority (NEDA) earlier said that the Philippine economy could generate P2.6 trillion annually if local businesses adopt AI.

BMI said workers in developed economies are more exposed to AI versus developing countries.

“The International Monetary Fund (IMF) argues that lower income countries could eventually leapfrog older technologies using AI and catch up developmentally with richer countries,” it said.

“However, we think the high cost of building the required infrastructure and highly skilled labor force makes achieving such a feat highly unlikely,” it added.

WIDER INCOME INEQUALITY
Generating the necessary investments to aid in the transition to AI may be increasingly difficult if AI “cuts off existing development paths,” BMI said.

“Furthermore, the proportion of workers who could benefit from AI is much smaller than those who stand to lose in these economies, which means there could well be strong public opposition to adopting AI,” it added.

BMI also noted how AI adoption can lead to a wider income inequality.

“AI will increase income and wealth inequality much like previous disruptive technologies like the internet,” Mr. Tay said.

Though AI has the capacity to boost productivity and incomes, the gap between the rich and the poor will likely widen as a result, BMI said.

This potential widening inequality can also hinder coordination and cooperation between countries.

“Social stability and international cooperation will probably deteriorate insofar as intra-country and inter-country inequality rises because of AI adoption.”

Inter-country inequality makes regional cooperation difficult, BMI said. It cited the challenges to climate change efforts due to the inequalities among countries.

“And in Asia, widening inter-country inequality can impede greater integration under such organizations as ASEAN (Association of Southeast Asian Nations). The counterargument is that developmental differences already exist and even if AI widened these gaps, the impediment to international cooperation may not increase appreciably.”

“However, the income gaps between middle-income and low-income countries tend to be much narrower, and we think that widening those (between Thailand and the Philippines for example) will have a material impact on international cooperation.” — Luisa Maria Jacinta C. Jocson