Today’s economic data has dropped a bombshell that could shake up the Reserve Bank of Australia’s (RBA) plans—and it’s all about jobs. But here’s where it gets controversial: could a stronger-than-expected labor market actually push interest rates higher sooner than anyone anticipated? Let’s dive in.
Two of Australia’s big four banks had already predicted rate hikes in February, but fresh employment figures released today by the Australian Bureau of Statistics (ABS) have thrown a wrench into the works. The data reveals a surprising drop in unemployment, falling from 4.3% in November to 4.1% in December. At the same time, the labor market is tightening, with job growth on the rise and underemployment easing. Sounds like good news, right? Not so fast. This comes at a time when inflation is falling, leaving the RBA with a mixed bag of signals to decipher.
Here’s the kicker: experts suggest this robust labor market could pave the way for an interest rate hike as early as February. But this is the part most people miss—the relationship between unemployment and inflation isn’t straightforward. Typically, economists expect inflation pressures to ease when unemployment hovers between 4.25% and 4.5%. But with unemployment dipping lower than expected, it hints that inflation might still be stubbornly persistent.
This new data arrives at a tricky time for policymakers. Earlier figures showed inflation dropped in November but remained above the RBA’s target range of 2-3%. Expectations of a rate hike had been growing late last year due to October’s stubborn inflation, but signs of easing in January cooled those predictions. Just yesterday, markets were forecasting only a 25% chance of a cash rate increase, down from 36% at the start of January, according to the ASX’s RBA Rate Tracker.
VanEck’s head of investments, Russel Chesler, weighed in, saying, ‘We’re now closer to an RBA rate rise, and market expectations may shift.’ While full employment is great news for Australians, it’s also a sign of an economy still running too hot for the RBA’s comfort. But is this enough to justify a rate hike, or are we overreacting to short-term data?
To put things in perspective, unemployment a decade ago was significantly higher at 6.2%. Even though job ads dipped in the second half of 2025, they’re still above pre-COVID levels. Chesler argues, ‘The current data points to a rate rise earlier than the market has been expecting.’
However, not everyone is convinced. AMP chief economist Shane Oliver warns that a rising unemployment rate would be a ‘warning sign’ for the RBA to ‘be cautious about raising rates.’ Meanwhile, Canstar insights director Sally Tindall points out that the RBA won’t base its decision on a single data point. ‘If it did, the cash rate would yo-yo, leaving borrowers, savers, and banks in a spin,’ she explains. Remember last September’s unemployment spike from 4.2% to 4.5%? It sparked rate-cut speculation, but the RBA held firm, emphasizing it wouldn’t react to one volatile result. Sure enough, the rate dropped again the next month, and the ABS revised the spike downward.
Looking ahead, REA Group economist Angus Moore believes the ABS’s upcoming inflation data will be the ‘most critical indicator’ for the RBA’s February meeting. ‘The RBA is laser-focused on inflation right now,’ he says. Meanwhile, Canstar analysis shows 53 lenders, including all the big four banks, have raised fixed rates since the RBA’s last meeting in December. Two lenders, Heritage Bank and People’s Choice, have even increased variable rates by 0.1% across several loan products.
But here’s the real question: With global tensions simmering—like the recent trade war threats from former U.S. President Donald Trump—should the RBA proceed with caution? Nerida Conisbee, chief economist at Ray White Economics, suggests these uncertainties could strengthen the case for holding rates steady.
So, what do you think? Is the RBA justified in considering a rate hike based on today’s employment data, or should it wait for clearer inflation signals? Let us know in the comments—this debate is far from over.
