There was plenty of attention on the RBA’s updated economic forecasts last week, as Australia’s post-COVID recovery strengthens.

The bank upgraded its forecasts for inflation (slightly), and now expects core CPI growth to hit 2.25% by the end of next year (up from 1.75%).

Still, it didn’t really budge on its outlook for interest rates. While opening the door to the prospect of a 2023 rate hike, it’s leaning towards 2024 in its base-case scenario.

But in analysis this week, CBA’s Head of Australian Economics, Gareth Aird, highlighted a specific passage of the RBA’s commentary accompanying its updated forecasts.

The art of communication

Those forecasts were “conditioned on a path for the cash rate broadly in line with recent market pricing”, the RBA said.

However, “there’s a problem”, Aird says; markets are pricing in rate hikes — plenty of them, and well before 2024.

The RBA finalised its numbers on November 3. At the time, “money markets had priced ~100bps (1%) of hikes to the cash rate in 2022, and another 60bps (0.6%) of hikes in 2023”, Aird said.

Taken in aggregate, the RBA’s latest projections result in core inflation growth of 2.5% and wages growth of 3% by the end of 2023.

Aligning those scenario projections with “recent market pricing” indicates the benchmark cash rate will be 1.75% by that time.

“This seems completely inconsistent with the line that the Board sees the first increase in the cash rate being in 2024,” Aird said.

It also raises the risk of grey areas in terms of how the central bank communicates with market participants.

As an alternative, Aird suggested that the RBA remove market pricing for interest rates from the equation.

Instead, they could issue a set of base-case scenario forecasts for key economic measures, based on no change in the cash-rate.

Having a think about what that would look like, Aird speculated that 2023 GDP projections would rise by another 0.5%.

There’d also be a reasonable argument for the RBA to up its inflation projections by another 0.5% as well.

Doing so would “almost certainly” allow the bank to accelerate its forward guidance on rate hikes — from 2024 to the second half of 2023, Aird said.

As it stands, CBA thinks rates will normalise before then, with the RBA shifting to a late-2022 hike in response to ongoing strength in Australia’s economic rebound.

But regardless, removing the assumptions around market pricing would be a step in the right direction in terms of how the RBA communicates with markets.

“Making this change would improve the link and transparency between the RBA’s economic forecasts and their forward based guidance on the cash rate, which is very important for a lot of Australian households and businesses,” Aird said.