Unemployment has fallen in Australia, dampening near-term hopes of interest rate cuts and raising the risk of future rate hikes.
The nation's jobless rate fell to 4.1% in December, in seasonally-adjusted terms, the Australian Bureau of Statistics (ABS) revealed on Thursday. That's down from 4.3% in November.
By state, Victoria had the highest unemployment rate in seasonally-adjusted terms, at 4.6%, followed by Tasmania at 4.5%. The Australian Capital Territory had the lowest rate at 3.5%.
The participation rate, in seasonally-adjusted terms, held steady at 66.7%, with 65,000 more employed people in December, 49,000 of them men.
Sean Crick, ABS head of labour statistics, said in December there were "more 15 to 12-year-olds moving into employment, contributing to the rise in overall employment and the fall in the unemployment rate."
Either way, a tighter labor market, coupled with continued inflation means the prospects of near-term interest rate reductions remain low.
"While there appears to be some noise in the December labour force survey (namely the increase in employment of 15 to 24-year-olds, a part of the data that has been volatile recently), the decline in the unemployment rate does make a February rate hike more likely at the margin," said Aaron Luk, an economist at ANZ.
Moreover, a strengthening economy, with more people employed and spending, risks reigniting inflation. While price pressures have eased slightly in recent weeks, inflation remains above the RBA’s target range.
The Australian Bureau of Statistics (ABS) released its monthly consumer price index (CPI) for November earlier this month, showing that both headline CPI and trimmed mean inflation eased slightly during the month.
Headline CPI rose 3.4% in the year leading up to November, down from 3.8% in October. Trimmed mean inflation increased 3.2% during the same time period, down from 3.3% in the 12 months leading up to October.
But the RBA has remained firm in its commitment to its 2% to 3% inflation target, and has made it clear that rates will not be reduced until inflation is firmly back within that range.
Moreover, September's quarterly CPI reading — which many economists believe is a clearer measure of underlying inflation because it tracks trends in the market — revealed that both headline CPI and trimmed mean inflation were on the rise.
While mortgage holders and investors might have to wait for any near-term interest rate relief — all four of Australia's Big Four banks have said the RBA is done cutting rates for the foreseeable future — some market players are now flagging the risks of rate hikes in 2026.
Harry Ottley, an economist at CBA, wrote in a note that Thursday's jobs report "lends support to our view that the RBA will increase the [official] cash rate to 3.85% in February. The labour market in totality is already too tight for comfort for the RBA.
"As we have commonly stressed though, seasonally-adjusted movements in the labour force survey are volatile," the economist added. "Monthly swings should not be over-interpreted."
The nation's central bank cut rates three times in 2025 — in February, May and August — bringing the current rate down to 3.6%.
The RBA meets again to discuss monetary policy on 2 and 3 of February.
