After abandoning its experimental bond-yield objective two days ago, the Reserve Bank of Australia is left with the trusty old tools of policy making, while traders continue to believe it is behind the curve.

While Governor Philip Lowe was able to calm the bond market after last week's rout, he hasn't changed market expectations for early interest rate hikes: three are still expected by the end of 2022. The focus now shifts to the RBA's quarterly update of economic forecasts, which will be released on Friday. 

The backdrop is a global economy trapped in one of the worst traffic jams in history, forcing central banks to abandon their belief that inflation is just transitory as evidence emerges that a supply chain problem is worsening.

In September, the RBA began tapering its own quantitative easing program, which will be reviewed again in mid-February.

Australia's central bank explores digital currency - Ledger Insights - enterprise blockchain

But it's not just the markets that are questioning Lowe's inflation forecast; some economists envision a highly vaccinated Australia recovering quickly, with consumer prices rising in sync. After statistics released last week showed underlying inflation surged to 2.1% in Q3, returning to the RBA's 2-3% target for the first time in six years, the CPI debate heated up.

Lowe has predicted core inflation would be 2.25% next year and 2.5% in 2023, indicating the possibility of a rate hike. The governor earlier stated that he did not expect conditions to be met for an increase before 2024.

"With supply constraints remaining in place and the economy in recovery mode, we anticipate underlying inflation to rise faster than the RBA predicts," Kristina Clifton, an economist at Commonwealth Bank of Australia, said. The first RBA rise, according to CBA, will occur in November 2022, raising the cash rate to 0.25% from the current 0.1%.