Earlier this month, the Reserve Bank (RBA) reverted to its old practice of providing guidance, with the governor pushing against market prices to cut interest rates until the end of 2024.

Michelle Bullock said it was “premature to think about a rate cut” and “a short-term cash rate cut is not in line with the board’s current thinking”.

Economists were caught off guard by the central bank’s decision to reintroduce forward guidance, particularly after the RBA’s 2022 review, which followed Philip Lowe’s erroneous prediction that “a hike is unlikely before 2024”.

Although the review concluded that "in most situations the preferred approach is to allow markets and the public to make inferences about the timing and extent of future movements in interest rates", Bullock has repeatedly indicated that a short-term cut in interest rates is unlikely. defining "near-term" as "by the end of the year and the next six months".

However, Bullock has sometimes prefaced her rate-related comments with the words "no forward guidance."

Commenting on the governor's unexpected return to speculative forecasting, the CBA's head of economics, Gareth Aird, said: "In our view, this is the way forward."

"Forward guidance, as it relates to monetary policy, is simply a communication about the central bank's intentions for future monetary policy."

Pointing to recent board minutes, Aird said several contradictory statements were made, including that the cash rate was unlikely to decline in the near term and that the board was not committed to a specific policy direction.

Additionally, Aird noted that the board's pledge to remain data-driven is also inconsistent with future guidance.

"History shows that data-dependent central banks will change their tune or 'gear' if the data is right. That's a good thing. There is no need for a central bank to be dogmatic about the future direction of monetary policy if the economic landscape develops differently from their forecasts,” Aird said.

“Central banks need to be flexible. And in many ways that's why future directions are often not a good policy option."

That mixed message and the lack of confidence in the bank's future guidance led markets to keep their interest rate expectations in check - pricing in a full 25 basis point rate cut by the end of the year.

According to Aird, CBA continues to side with market pricing.

"[We] I think it's more likely than not that we'll see a rate cut by the end of the year," the economist said.

While chief economist Shane Oliver maintained the risk of a cut by the end of the year remained high, following higher-than-expected inflation data in May, AMP now expects the first rate cut to happen in February next year.

That decision was taken on the basis that "we don't think the RBA will be confident enough to start tapering by then," Oliver said.

"I actually think they should cut, which of course is different than what I think they're going to do," he told InvestorDaily.

Oliver explained that experience in other countries shows how quickly things can change.

“Earlier this year some at the Fed were talking about raising interest rates and no cuts this year, and in May the RBNZ was thinking about cuts. The RBNZ has now cut and turned dovish and the Fed is almost certain to cut next month. All that was needed in both countries was slightly lower inflation and weaker economic data,” Oliver said.

"Weaker global economic data will weigh on Australia and in any case, just as Australia's inflation and interest rates lagged on the way up in 2022, they are now doing the same on the way down, so we see no reason why will differ significantly from other countries that are now cutting or transitioning to cutting interest rates.

Oliver believes there is a "very high risk" Australia will see weaker economic data and inflation over the next few months.

“When facts change, central banks change. Just like we saw in 2022 when the RBA went from 'no hikes until 2024' to lots of hikes after inflation and the economy surprised to the upside," the economist said.

On the bank's future guidance, Oliver said he too was surprised, given that the central bank appears to have sworn off the 2021-22 trial. and the damage they did to her confidence.

However, he opined that regardless of guidance, "the RBA will also be quick to move towards earlier rate cuts if economic data warrants it."

Ultimately, he noted that "the divergence between the RBA and the market's view on rates reflects different expectations about the economic outlook".