Australian Employment Data Strong
Fresh employment data has thrown a spanner in the works for the Reserve Bank that could keep the case for an interest rate hike in the coming months alive. ABS figures released today showed a surprise drop in unemployment, along with tightening in the labour market, all at a time of falling inflation – a trend that will send the Central Bank mixed signals.
The ABS’s latest Labour Force statistics published today showed the unemployment rate in December dropped to 4.1 per cent, down from 4.3 per cent in November. Jobs in the economy also grew while underemployment eased – signs of a tightening in labour conditions. Experts have revealed that the stronger than expected labour market could point to a hike in interest rates as early as February. Lower unemployment was attributed to a rise in 15–24-year-olds moving into jobs.
The interplay between the labour market and rates remains complex, but an unemployment rate of 4.25-4.5 per cent is normally where economists expect slower inflation pressures from the jobs market. Lower than expected unemployment hints at still persistent inflation. The new employment data comes at a tricky time for monetary policy makers. Figures published earlier this month showed inflation dropped over November but remained above the RBA target band of 2-3 per cent. Expectations of a hike in interest rates were growing in late 2025 due to stubborn inflation reported in October, but signs of easing inflation in January tempered these predictions. Markets yesterday were forecasting a 25 per cent chance of an increase in the cash rate, down from a 36 percent chance at the start of January.
VanEck head of investments Russel Chesler said the employment figures mean “we’re now closer to an RBA rate rise” and market expectations may change. The current data points to a rate rise earlier than the market has been expecting. Canstar insights director Sally Tindall said the employment data would give the Reserve Bank a lot more to think about next month. However, the Board won’t be reacting to just one number, as demonstrated by last September’s spike in unemployment from 4.2 per cent to 4.5 per cent, which sparked speculation of rate cuts that never materialized.
REA group economist Angus Moore said the upcoming inflation data release will now be the most critical indicator of the direction of RBA rates. It comes as Canstar analysis showed 53 lenders have increased fixed rates since the Reserve Bank’s last meeting in December, including all the “big four” banks, who have raised fixed rates by up to 0.7 percent.
