RBA Hike Risk Reignited as Middle East Conflict Escalates

The ongoing conflict in the Strait of Hormuz and US President Trump's hawkish stance have injected uncertainty into the Reserve Bank of Australia's (RBA) interest rate decision-making process.

MUFG, a global banking and financial services company, suggests that this external inflation risk could prompt the RBA to hike rates again in the coming months. The bank notes that Brent crude oil prices have extended their recent gains, with no sign of a breakthrough in the Strait of Hormuz, which has contributed to rising energy costs.

The RBA held its cash rate steady at 4.35% during its meeting on Tuesday, but Governor Michele Bullock hinted that another rate hike is still possible. MUFG believes that if energy prices continue to rise, September could become a busy month for central banks looking to respond to renewed inflation risk.

The bank's own base case assumes a Middle East deal will be reached before the US mid-term elections in November, which would spare the RBA from needing to raise rates further. However, MUFG warns that this is a close call and that markets have already begun to price in an additional rate hike by next March.