The Australian dollar traded in a narrow range near 0.7060 on Wednesday morning in Asia, holding almost flat as oil prices continued to strengthen, adding new uncertainty to the Reserve Bank of Australia's policy outlook.
MUFG noted that Brent crude oil prices have risen again as President Trump hardens his stance on Iran and the Strait of Hormuz remains blocked. The bank warned that if energy prices continue to climb, September could become a "busy month" for several central banks, which may be forced to raise interest rates to counter renewed inflation risks.
Trump's Hardline Stance and the Strait of Hormuz Impasse
MUFG pointed out that Brent crude has been rising steadily, with no breakthrough in reopening the Strait of Hormuz. Trump's intensified public position is a core driver—he has firmly rejected any form of compensation demands from Iran and repeatedly stressed that Iran must pay for its long-standing "aggressive behavior" in the region, including threats to shipping security, support for allies, and destabilization of the area. This escalation in rhetoric not only reflects the US's zero-tolerance policy toward Iran but also directly boosts market expectations of a prolonged conflict. As a key chokepoint for global oil transport, any sustained disruption or escalating threat to the Strait of Hormuz will quickly translate into a tangible supply risk premium.
MUFG believes that the market had previously hoped for a price pullback due to a de-escalation, but Trump's public hardline stance has rapidly cooled those expectations. As a result, conflict-related inflation pressures may reemerge just as investors begin pricing in a "soft landing" scenario, creating new upside risks. If the impasse extends into autumn, crude oil price volatility will further amplify global inflation uncertainty and trigger ripple effects on risk assets and monetary policy expectations. The persistence of this geopolitical premium means the energy market is unlikely to return to normal supply-demand pricing logic in the short term.
Rising Energy Prices Could Force Multiple Central Banks to Hike
MUFG's core concern is that if the Middle East conflict leads to a significant further rise in energy prices, September could become a "busy month" for several central banks forced to act. An externally fueled inflation shock, if it strengthens and persists, will compress the operational space of central banks between weak domestic conditions and price stability, potentially making rate hikes a necessary option again.
Taking the RBA as an example, MUFG assesses that if oil and energy-related commodity prices rise notably in the coming weeks, the possibility of a September rate hike cannot be ruled out. However, the bank also noted that recent RBA communication has not conveyed a strong sense of "urgency." This reflects that, with current monetary policy already assessed as somewhat restrictive, policymakers still have room to wait for more data. They need to balance signals of higher unemployment and a weak housing market to avoid prematurely tightening and causing excessive damage to domestic demand. In other words, if an external energy shock escalates, it will force central banks to recalibrate their priorities between "fighting inflation" and "supporting growth," and September could be a key window for this trade-off to materialize. On a global scale, if multiple countries face similar pressures simultaneously, uncertainty over interest rate paths will rise significantly.
The RBA's "External Inflation Trap"
MUFG particularly noted that RBA Governor Michele Bullock acknowledged that "it is still quite possible that we will need to raise interest rates again." This statement is interpreted as the board, like many central banks globally, caught in a dilemma between weak domestic conditions and unpredictable, externally sourced upside inflation risks. The RBA's latest forecasts reinforce this contradiction: headline and core inflation are not expected to return to the midpoint of the 2.5% target range until early 2028. This means that for a considerable period ahead, the policy rate may need to remain at restrictive levels to cope with potential external shocks.
MUFG pointed out that if risks related to the Strait of Hormuz cause energy prices to surge again, external inflation pressures will worsen, and the RBA may be forced to raise rates earlier or more than planned. The essence of this "external inflation trap" is that the domestic economy is already showing signs of weakness but must pay the price for overseas geopolitical events, eroding the autonomy of monetary policy. Once the forecast trajectory is disrupted by an external shock, the market's pricing of the timing and terminal rate for hikes will be rapidly reassessed, increasing volatility in the Australian dollar and interest rate markets.
Market Begins to Price In Rate Hike Risk
The market has already started to reflect this uncertainty. Australia's two-year government bond yield rose 2-3 basis points on the day, and a rate hike by March next year is now nearly fully priced in. MUFG emphasized that this risk is entirely driven by external inflation pressures, not domestic factors. The bank's base scenario still assumes that the Middle East conflict will not escalate further and that an agreement will eventually be reached before the US midterm elections in November, meaning the RBA will not need to hike again. However, MUFG explicitly stated that this is a "close call"—and the tone of today's RBA communication has reinforced that view.
Summary
MUFG noted that Trump's hardline stance and the Strait of Hormuz impasse are continuously pushing oil prices higher. If energy prices continue to rise, September could become a "busy month" for many central banks. While the RBA has kept rates unchanged, a September rate hike remains possible if oil prices rise significantly in the coming weeks. Governor Bullock acknowledged that "it is still quite possible that we will need to raise interest rates again," but the central bank's communication has not shown urgency. The RBA's latest forecast indicates that inflation will not reach the midpoint of the target range until early 2028, and a worsening of external inflation risks could force the bank to act again. The market has already begun pricing in this risk, with a rate hike by March next year nearly fully priced in. MUFG's base scenario still assumes the Middle East conflict will not escalate further and a deal will be reached before November, but it explicitly states this is a "close call"—the risk of an RBA rate hike has not disappeared. The bank also believes that against the backdrop of low volatility, the Australian dollar against the Japanese yen is likely to further recover the losses caused by the intervention in late July.
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