CreditorWatch’s Ivan Colhoun weighs in on whether the RBA will raise rates in early February.
What’s happening: The unemployment rate averaged 4.2% for the December quarter, below the Reserve Bank of Australia’s estimates and reinforcing views that labour conditions remain tight.
Why this matters: The stronger-than-expected employment data complicates the RBA’s monetary policy stance, with major economists now predicting a 25 basis point interest rate increase at the central bank’s early February meeting.
Australia’s labour market finished 2024 on a surprisingly strong note, defying expectations and potentially forcing the Reserve Bank of Australia’s hand on interest rates.
The Australian Bureau of Statistics reported that employment rose by 65,000 in December, more than reversing the 29,000 decline recorded in November. The unemployment rate fell to 4.1%, significantly lower than market forecasts of 4.4%.
“This month we saw more 15-24 year olds moving into employment, contributing to the rise in overall employment and the fall in the unemployment rate,” Australian Bureau of Statistics said Sean Crick, ABS head of labour statistics.
December employment surge
The data represents a significant turnaround from November’s peculiar employment decline. CreditorWatch Chief Economist Ivan Colhoun notes that monthly employment changes can be very volatile, and falls in employment are usually reversed within one month.
“While we can debate the volatility of the monthly Australian labour market data, the broad indication is that the Australian labour market remains in very good health, with positive employment growth and very low unemployment and underemployment,” Colhoun said in his economic brief.
The strength wasn’t limited to headline employment figures. Underemployment dropped sharply to 5.7%, more than reversing the previous month’s suspicious 0.4 percentage point rise. Youth unemployment also fell significantly, dropping 0.9 percentage points to 9.1%.
Below equilibrium levels
The December quarter unemployment rate averaged 4.2%, notably below the RBA’s November forecast of 4.4% and well under the central bank’s 4.5% estimate of the NAIRU (non-accelerating inflation rate of unemployment).
State-level data reveals even tighter conditions. New South Wales, Queensland, Western Australia, South Australia and the Northern Territory all recorded seasonally adjusted unemployment rates of 3.9% in December. Even Victoria, which has consistently recorded higher unemployment than the rest of the country, saw its rate drop 0.2 percentage points.
“It’s very hard to construct an argument against the RBA Board endorsing a 25bps increase in the official cash rate in early February on the basis of partial inflation indicators already received this quarter,” Colhoun said.
The economist cautioned that whilst the data shouldn’t be over-interpreted due to monthly volatility, it rules out any suggestion that the labour market is softening to a significant degree.
Rate hike increasingly likely
Financial markets responded swiftly to the employment data. According to The Nightly, overnight markets had tipped only a one-in-four chance of a hike at the RBA’s next meeting in February, but Global X senior investment strategist Marc Jocum said that surged to 50-50 immediately after the data was released.
Major banks including Commonwealth Bank and NAB are already positioning for a rate increase. Both predict the RBA will lift the cash rate by 0.25 percentage points to 3.85% at its early February meeting.
Commonwealth Bank Head of Australian Economics Belinda Allen said the economy has picked up more momentum than expected, keeping inflation from easing.
“A small rate increase in February would guide inflation back toward the RBA’s target range of 2-3 per cent,” CommBank Allen said.
For monetary policy watchers, the key determinant will be the December quarter trimmed mean CPI outcome, due in late January. Colhoun notes that a trimmed mean CPI of 0.9% quarter-on-quarter would cement the case for a rate increase, whilst even a 0.8% outcome would be very unwelcome from the RBA’s perspective.
The central bank’s models are normally quite sensitive to the latest data point, and with the unemployment rate averaging 4.2% in the December quarter compared to the forecast 4.4% average, the labour market data represents another factor working against the RBA’s inflation targets.
Despite the volatility in monthly readings, the conclusion remains clear: the unemployment rate is very low in Australia, which won’t be helpful in returning currently above-target inflation to 2.5% any time soon.
The RBA’s next monetary policy meeting is scheduled for 2-3 February 2026, with the decision to be announced at 2:30 pm on 3 February.
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