While the oil-induced inflation spike in the Philippines is raising concerns, think tank Capital Economics expects the Bangko Sentral ng Pilipinas (BSP) to keep key interest rates steady for the rest of the year.

In an April 15 report, Capital Economics chief emerging markets (EMs) economist William Jackson said that across EMs, March consumer price index (CPI) data suggest that the energy price shock has so far had a limited impact on inflation due to energy subsidies, delayed pass-through, and weak underlying price pressures.

Preliminary Capital Economics estimates showed that EM inflation rose only slightly to 3.1 percent year-on-year from 3.0 percent, or to 4.2 percent from 3.9 percent excluding China, with most major economies also printing below consensus expectations.

“That said, there are a few areas of concern—parts of Latin America and the Philippines,” Jackson said, citing that March saw a pronounced inflation rise in these economies, with readings exceeding both consensus forecasts and central bank targets, and with core inflation also strengthening beyond energy-related pressures.

“The implications for monetary policy in these countries [are] mixed. In Colombia, where interest rate hikes were underway before the energy shock, further tightening is on the cards. We suspect that central banks in Peru and the Philippines will opt to leave rates unchanged this year,” Jackson said.

But for most EMs, Jackson believes that the latest CPI data support the view that many central banks are likely to maintain an extended pause rather than resume interest rate hikes, as the inflation impact—while still evolving through producer price pressures and delayed energy pass-through—is expected to remain insufficient to trigger widespread tightening.

In an earlier report last week, Capital Economics senior Asia economist Gareth Leather said the Philippines stands out in Asia for the intensity of the oil price shock.

“The exception to this generally benign [inflation] picture [in the region] was the Philippines, where the headline rate rose to a 20-month high on the back of a sharp increase in transport costs,” Leather said, referring to the March inflation rate of 4.1 percent.

While inflation remains close to the BSP target range, Leather said risks are tilted to the upside. “Although inflation is only marginally above the BSP’s two- to four-percent target, we expect it to rise further in the coming months, peaking at around 5.5 percent in mid-year before easing.”

For Leather, the challenge for monetary authorities lies in responding to inflation driven largely by supply-side shocks. “At an unscheduled meeting in late March, when it left rates unchanged, the BSP acknowledged inflation would breach its tolerance band but argued that expectations remain anchored and that monetary policy has limited traction against a supply-side shock. Instead, it will focus on possible second-round effects from the energy shock,” he noted.

Leather added that recent developments may provide temporary relief. “The fall in oil prices after the announcement of a two-week ceasefire will further have eased concerns. Overall, we think energy prices would need to rise much further and stay elevated for an extended period for the BSP to hike rates.”