The Reserve Bank of Australia (RBA) stated on Monday that economic forecasts are highly uncertain, a key reason why policymakers have maintained their current stance on interest rates while awaiting additional data.

Deputy governor of the central bank, Andrew Hauser said that inflation had remained stubbornly high, partly because the economy had less spare capacity than previously believed. However, he acknowledged that these estimates are still prone to error.

Consequently, the RBA's latest forecasts indicated that core inflation, which stood at 3.9% in Q2, is not expected to return to the target range of 2-3% until the end of 2025, Reuters reports.

That said, Hauser added that this adjustment in the assumption is minor compared to the significant uncertainty surrounding these forecasts.

“As humans, we are all prone to overconfidence, particularly when forecasting the future. In many cases, the answer we ought to give is that we simply do not know,” Hauser stated.

“In some cases, uncertainty may induce you to be less activist – as you wait for more data, or try to avoid triggering tail risks through your own actions.”

He also mentioned that there is a risk that unemployment could increase more rapidly than forecast while consumption may surge more strongly due to an expected rise in household wealth.

The RBA has kept its policy unchanged since November, considering the current cash rate of 4.35%, a significant increase from the 0.1% during the pandemic, as sufficiently restrictive to bring inflation down to the target while still maintaining employment gains.

Furthermore, some analysts contended that the rates were not high enough, but the RBA's reluctance to raise them further has led most economists to anticipate a rate cut early next year, lagging behind other major central banks.

As it stands, markets are now betting on an easing by the end of the year, a shift from their recent stance that suggested the possibility of another rate hike. 

“Beware anyone who claims it is obvious what to do – for they are false prophets!” Hauser added.