The EM scramble to strike policy balance could lead to a wave of volatility: As the global commodities boom threatens to cause a surge in inflation, central banks in emerging markets are faced with an age-old dilemma: keep rates high to hold down prices or accommodate growth and pour more fuel on the fire. The first option would anchor growing price pressures as the world emerges from covid but it comes at the expense of muted growth from elevated rates.

The tension between the need for growth and the fear of inflation was on display last week, as several EM central banks unexpectedly hiked rates in anticipation of accelerated inflation. Russia’s central bank unexpectedly increased rates for the first time since 2018, while Brazil raised rates by more than economists had forecast in its first rate-hike in six years. Then there’s Turkey, which is now in a crisis after that country’s president sacked his third central bank governor in two years. The governor’s offense? Not playing ball and lowering rates.

Either way, the path ahead could be bumpy: “The tug of war between accommodative policies and robust growth … could result in heightened volatility,” Barclays Capital’s Christian Keller and Michael Gapen wrote in a recent report picked up by Bloomberg. Hikes in borrowing costs — most significantly in the US — will “illuminate” challenges faced by emerging markets as the USD strengthens and rising US treasury yields, they wrote.

US bonds have experienced a fierce sell-off in recent weeks amid rising concern by fixed-income investors over inflation and a possible earlier-than-expected rate hike. The yield on the 10-year note is currently on its longest rising streak since early 2018 after climbing for a seventh consecutive week last week, Bloomberg notes.

Higher US yields could mean higher borrowing costs in EM: If we continue to witness a rally in US treasury yields, alongside stimulus-driven inflation, this means “a decent chance for more pain” for EM bonds, BBVA strategist Danny Fang said. “The rise in US rates is a reflection of the ongoing inflation concerns. There are inflation concerns in parts of the emerging markets too, but beyond inflation, the higher US rates can lift local rates up too on a short-term basis as well.”

So far, EM assets are sending mixed signals: Currencies made gains last week, ending their longest weekly losses streak since August 2019, Bloomberg says. The MSCI gauge of equities, however, ended the week in the red for the first time since late February. Still, volatility levels in stocks remain low, with the Cboe Emerging Markets ETF Volatility Index, a VIX for EM equities, still much lower than its pandemic high. Net inflows into the largest EM-focussed ETFs were also positive, extending a 20-week run.

Who’s meeting this week? Policymakers in Thailand, South Africa and Mexico are expected to hold their policy rates when they meet this week, with Thailand likely to put emphasis on “targeted measures” and Mexico and South Africa to wait-and-see. Hungary, Czech Republic, Nigeria and Ghana are also set to leave their benchmark rates on hold.