Unemployment figures stoke inflation fears
Updated ,first published
Financial markets have doubled down on the odds of an interest rate hike in Australia in less than two weeks after a surprise drop in the unemployment rate led to warnings that the contraction in the country’s labor market was fueling inflation.
On Thursday, the ABS said the economy created 65,200 jobs in December, much stronger growth than expected, while the unemployment rate fell from 4.3 percent to 4.1 percent.
While money markets increased the implied probability of an interest rate increase next month to over 50 percent after the statement, some economists argued that the figures strengthened the claim that the RBA would start 2026 by increasing the cash interest rate from 3.6 percent to 3.85 percent.
The Australian dollar jumped to its highest level in more than a year, reaching 67.91¢, and the ASX 200 lost some of its initial gains but was still 0.7 per cent higher at 14:20 AEDT.
Investment bank UBS changed its forecast in response to the data; Economist George Tharenou said the figures were the latest sign that Australia’s labor market was tightening rather than loosening. A tighter labor market tends to fuel higher inflation, which is already outside the RBA’s 2 to 3 per cent target range.
“For the RBA, the labor market still needs to ease to reduce pressure on inflation and provide confidence to achieve the CPI target,” Tharenou said.
HSBC also revised its forecast for next month to an increase and announced that it foresees an interest rate increase in the September quarter. Chief economist Paul Bloxham said he thought next month’s rate hike would be “painful” because it was the result of the economy reaching the limits of its capacity and weak productivity growth.
If the RBA hikes rates next month, it would be the central bank’s first cash rate increase since late 2023, after three rate cuts in 2025 under Governor Michele Bullock’s leadership. Even so, some economists are not convinced there is a case for tightening monetary policy and foresee a period of stability for interest rates.
AMP deputy chief economist Diana Mousina said the likelihood of an implied rise in official interest rates in February rose from 26 per cent to 56 per cent after the figures were published. But Mousina said AMP believes the central bank is more likely to keep interest rates steady in the near future.
Although the rate hike would be a blow to the government, Chancellor of the Exchequer Jim Chalmers welcomed the jobs figures as evidence that Labour’s economic strategy was working.
“Our three big economic priorities for this year are inflation, productivity and addressing global uncertainty, and our resilient labor market gives us a strong foundation to build on the progress we have already made,” he said.
The ABS said that alongside the increase in employment in December, there was also a decrease in underemployment, which refers to people who have jobs but want more hours. Underemployment, which economists see as an indicator of the contraction in the labor market, decreased by 0.5 points to 5.7 percent.
ABS head of labor statistics Sean Crick said the decline in underemployment was more pronounced among younger workers. “Fewer young people were underemployed in December; the underemployment rate in the 15-19 age group fell 2.1 points to 17.4 percent,” Crick said.
On the share market, the ASX200 index rose 65 points, or 0.7 per cent, to 8847.9, with nine of 11 industrial sectors in positive territory. The rise followed an overnight rally on Wall Street after Trump thwarted his threat to impose tariffs on several European countries over their opposition to a US takeover of Greenland, saying he had “a framework for a future agreement” on Arctic security.
Financial stocks rose at the open and received further support from employment figures; Commonwealth Bank (up 1.6 per cent), Westpac (up 1.1 per cent), National Australia Bank (up 2.6 per cent) and ANZ Bank (up 0.6 per cent) were sharply higher in afternoon trade.
Among miners, Rio Tinto gained 1.1 percent, while BHP lost 0.5 percent. Fortescue fell 4.4 percent after it said it shipped a record amount of iron ore in the six months to December 31. Gold miners retreated; Northern Star fell 2.1 percent and Evolution Mining fell 0.8 percent.
Energy stocks rose as oil prices strengthened as traders evaluated US President Donald Trump’s statement that the US had reached a “framework” for a deal on Greenland. While Woodside Energy increased by 2.7 percent, Santos increased its production by 5 percent in the fourth quarter, increasing by 4.1 percent.
On Wall Street, the S&P 500 rose 1.2 percent after Trump said the deal “if completed, would be a great deal for the United States and its allies in the North Atlantic region.” The announcement triggered a spike in the stock market, which was consoled earlier in the day after Trump toned down his rhetoric and told business and government leaders in Europe that he would not use force to take away the “ice floe.”
The easing has helped the S&P 500 recover just over half of its 2.1 percent decline from the previous day and move closer to its all-time high earlier this month. The Dow Jones Industrial Average rose 588 points, or 1.2 percent, and the Nasdaq composite rose 1.2 percent.
with AP
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Clancy Yeates is deputy business editor. He covered banking and financial services and was previously a national business correspondent in the Canberra bureau.Connect with: excitement or email.
