Two of the big four banks had forecast rate hikes in February.
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.
Australian Bureau of Statistics 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.
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RBA Governor Michele Bullock will announce the next rates decision in February. Picture: NewsWire / Christian Gilles
Lower unemployment was attributed to a rise in 15-24 year olds moving into jobs, according to the ABS.
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 per cent chance at the start of January, according to the ASX’s RBA Rate Tracker.
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.
“While it’s good news that Australians are fully employed, this is another indicator of a robust economy and inflation levels that are still too high for the RBA,” Mr Chesler said.
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The RBA is widely tipped to use the employment data, and coming inflaton reports, to guide the cash rate decision. Pictue: Christian Gilles
“To put it into perspective, the unemployment rate 10 years ago was considerably higher at 6.2 per cent. Job ads, although having fallen in the second half of 2025, remain above pre-COVID levels,” Mr Chesler said.
“The current data points to a rate rise earlier than the market has been expecting.”
A modest rise in unemployment would have the made the case for a hold in the cash rate stronger.
AMP chief economist Shane Oliver told AAP a rising unemployment rate would flash a “warning sign” to the RBA to “be cautious here in raising rates”.
Canstar insights director Sally Tindall said the employment data would give the Reserve Bank a lot more to think about next month.
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Employment has been high in the Western Australian mining sector.
“The RBA isn’t just in charge of keeping prices in check. It’s in charge of making sure Australia’s jobs market remains strong and a sustained lift in unemployment could well (have) put a handbrake on the prospect of future hikes,” she said.
“However, the Board won’t be reacting to just one number. If it did, the cash rate would go up and down like a yo-yo, sending borrowers, savers and banks into a spin.
“Last September’s spike in the unemployment rate from 4.2 per cent to 4.5 per cent is a good case in point. The surprise jump sparked speculation the RBA would cut rates at the very next meeting. The RBA, however, did not react, making it clear it would not be changing course based on one result from an often-volatile dataset.
“The very next month, the unemployment rate dropped again and the spike was revised down by the ABS.”
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REA group economist Angus Moore said the ABS upcoming inflation data release will now be the most critical indicator of the direction of RBA rates.
“The RBA is very focused on inflation at the moment, and next week’s inflation release is really going to be the most important factor in determining what we see at the February meeting,” Mr Moore said.
It comes as Canstar analysis showed 53 lenders have increased fixed rates since the Reserve Bank’s last meeting in December.
This included all the “big four” banks, who have raised fixed rates by up to 0.7 per cent.
Two lenders, Heritage Bank and People’s Choice, have raised variable rates by 0.1 per cent across six owner-occupier and investor loan products, Canstar revealed.
Nerida Conisbee, the chief economist at Ray White Economics, said recent global tensions may strengthen the case for a hold.
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US President Donald Trumps threats, later retracted, over Greenland have hinted at a more uncertain global economic environment. Picture: Getty Images
US President Donald Trump threatened to raise tariffs on goods from eight European countries amid tensions over Greenland, raising the spectre of a transatlantic trade war.
Tensions appear to have simmered down, with Trump calling off tariffs planned for February, but the global stoush over trade just weeks before the RBA’s February interest rate meeting could motivate RBA caution.
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