What’s happeningThe unemployment rate averaged 4.2% in the December quarter, which is lower than Reserve Bank of Australia estimates and reinforces views that working conditions remain tight.
Why this mattersThe stronger-than-expected employment data is complicating the RBA’s monetary policy, with major economists now predicting a 25 basis point rate hike at the central bank’s meeting in early February.
The Australian labor market ended 2024 surprisingly strong, defying expectations and potentially putting 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 fall of 29,000 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 entering the workforce, contributing to the increase in overall employment and the decline in the unemployment rate,” Australian Bureau of Statistics said Sean Crick, ABS’s head of labor statistics.
The employment increase in December
The data represents a significant reversal from November’s remarkable decline in employment. CreditorWatch chief economist Ivan Colhoun notes that monthly changes in employment can be very volatile, and employment declines are typically reversed within a month.
“While we can debate the volatility of monthly Australian labor market data, the general indication is that the Australian labor market remains in very good health, with positive employment growth and very low unemployment and underemployment,” Colhoun said in his economics brief.
The strength was not limited to key employment figures. The underemployment rate fell sharply to 5.7%, more than reversing the suspicious 0.4 percentage point increase from the previous month. Youth unemployment also fell significantly: by 0.9 percentage points to 9.1%.
Below equilibrium levels
The December quarter unemployment rate averaged 4.2%, significantly lower than the RBA’s November forecast of 4.4% and well below the central bank’s NAIRU (non-accelerated inflation of unemployment) 4.5% estimate.
State-level data shows even stricter conditions. New South Wales, Queensland, Western Australia, South Australia and the Northern Territory all recorded a seasonally adjusted unemployment rate of 3.9% in December. Even Victoria, which consistently has higher unemployment than the rest of the country, saw unemployment fall by 0.2 percentage points.
“It is very difficult to think of an argument against the RBA board approving a 25 basis point increase in the official cash rate in early February based on partial inflation indicators already received this quarter,” Colhoun said.
The economist warned that while the figures should not be over-interpreted due to monthly volatility, they rule out any suggestion that the labor market is softening significantly.
Interest rate increases increasingly likely
The financial markets reacted quickly to the employment figures. According to The Nightly, overnight markets had indicated only a one-in-four chance of a rise at the RBA’s next meeting in February, but Marc Jocum, senior investment strategist at Global
Major banks, including Commonwealth Bank and NAB, are already preparing for a rate hike. Both predict the RBA will raise the cash rate by 0.25 percentage points to 3.85% at its meeting in early February.
Belinda Allen, head of Australian economics at Commonwealth Bank, said the economy has gained more momentum than expected, preventing inflation from easing.
“A small rate hike in February would return inflation to the RBA’s target range of 2-3 percent,” CommBank Allen said.
For monetary policy observers, the key driver will be the December trimmed average CPI outcome, expected at the end of January. Colhoun notes that a reduced quarterly average CPI of 0.9% would strengthen the case for a rate hike, while even a 0.8% outcome would be highly unwelcome from the RBA’s perspective.
The central bank’s models are normally quite sensitive to the latest figures, and with the unemployment rate averaging 4.2% in the December quarter, compared to the forecast average of 4.4%, labor market data represents another factor working against the RBA’s inflation targets.
Despite the volatility in the monthly figures, the conclusion remains clear: the unemployment rate is very low in Australia, which will not help quickly reduce inflation, which is currently above target, to 2.5%.
The RBA’s next monetary policy meeting is scheduled for February 2-3, 2026, with the decision announced on February 3 at 2:30 p.m.
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