The Reserve Bank may have dropped the phrase "not ruling anything in or out" in its interest rates commentary, but that does not mean an interest rate hike is completely out of the question.

The RBA's chief economist, Sarah Hunter, has delivered a speech in Adelaide titled Shedding Light on Uncertainty: Using Scenarios in Forecasting and Policy.

The speech outlined macroeconomic scenarios which would warrant both tighter and looser monetary policy.

"As forecasters, [scenarios] can help us think through and communicate risks around our baseline.

"For example, by identifying which risks the forecast might be particularly sensitive to, and the balance of risks around the central case.

Why spend so much time on forecasts often proven wrong?

While the board made what's known as a "dovish pivot" on Tuesday after its two-day long meeting — indicating the RBA was laying the groundwork to begin cutting interest rates next year, that pivot was based on all available data now available to the board.

If it's presented with new data, by definition, then policy plans would change.

Complicating matters is the time lag between when a monetary policy decision is made and its effect on the real economy, as Dr Hunter explained

"…We know the future is uncertain, and the forecasts will usually be wrong in various ways.

"Given the uncertainty in forecasts, why spend so much time and effort on them?

"The answer is that monetary policy operates with a lag, which means the board needs to think ahead when setting the cash rate target today.

"Given the importance of looking ahead in the monetary policy decision and the fact that we know forecasts often do not come to pass, there is significant value in thinking through the ways in which actual outcomes might deviate from the forecast," Dr Hunter said.

Households and China key uncertainties

So what outcomes is the bank suggesting? There are two.

One is around household income growth and consumption.

"Household real income is currently being lifted by the stage 3 tax cuts taking effect," Dr Hunter noted.

"But we cannot be certain how consumers will react to this lift in income."

The second is around Chinese fiscal stimulus.

"China is a large economy and Australia's largest export destination, which means its trajectory is important for Australian monetary policy setting.

"One way we have explored that is to consider the effects of Chinese fiscal spending being higher than expected."

If these economic uncertainties differ wildly from the RBA's "baseline" forecasts, policy would need to adapt.

That is because, as Dr Hunter explained, it would mean the RBA's key policy goal of achieving its mid-point annual inflation target of 2.5 per cent by 2026 would be in doubt.

"The two cases considered here do not achieve these outcomes.

"That is, they would not bring the economy back into balance in the second half of 2026.

It means that there is a possibility that either interest rate cuts could be brought forward, or alternatively another rate hike, if unexpected scenarios play out.

However, Dr Hunter is keen to point out that "these are not actual scenarios the board has considered".

Unemployment shock an example of uncertainty

The key point is that the RBA is faced with policy uncertainty — we saw that this week.

Tuesday saw the financial markets raise their expectations of a February interest rate cut after the RBA's post-meeting statement said it was "gaining some confidence that inflation is moving sustainably towards target".

But Thursday brought another economic surprise.

The unemployment rate for November fell to 3.9 per cent, from 4.1 per cent in October.

A greater-than-expected 36,000 jobs were created, and the number of people unemployed fell.

Both Treasury and the Reserve Bank forecast unemployment will climb to 4.5 per cent.

Indeed, that's what current monetary policy settings are based on.

Economists have highlighted this data set could shift the RBA's thinking on the timing of the first interest rate cut.

"Yes, I think for them to move on rates they're still going to be placing close attention to those inflation numbers and at the moment inflation should be coming down [but] they might be expecting that corresponds to an increase in the unemployment rate, reflecting a slowdown in the economy, and that's not what we see in the labour market numbers at the moment," Canberra University Associate Professor Leonora Risse said.

Betashares chief economist David Bassanese was more direct, titling his note "Bye-bye February rate cut".

"The bottom line is that the December quarter CPI report in late January will now need to be very low for the RBA to consider a rate cut as early as February," he said.

"Accordingly, my base case remains that the RBA will hold fire on rates at least until May — which would likely be after the next federal election."

Human beings like certainty, and while the expectation is that the RBA will deliver an interest rate cut at some point in the first half of 2025, nothing can be taken off the table.