Strong jobs figures double chances of RBA rate hike next month

Financial markets have doubled the odds of a hike in Australian interest rates in less than a fortnight, after a surprise fall in the unemployment rate sparked warnings that tightness in nation’s labour market is adding to inflation.

The ABS on Thursday said the economy created 65,200 jobs in December, which was much stronger growth than expected, while the unemployment rate fell from 4.3 per cent to 4.1 per cent.

Money markets lifted the implied odds of a rate rise next month to more than 50 per cent after the release, while some economists argued the figures strengthened the case for the RBA to kick off 2026 by raising the cash rate from 3.6 per cent to 3.85 per cent.

The Australian dollar jumped to its highest level in more than a year, hitting US67.91¢, while the ASX 200 shed some gains soon after the ABS release, but still closed 0.8 per cent higher, at 8848.70 points.

Investment bank UBS changed its forecast in response to the data, with economist George Tharenou saying the figures were the latest sign that Australia’s labour market was tightening, rather than easing. A tighter labour market tends to feed into higher inflation, which is already outside the RBA’s target band of 2 to 3 per cent.

“For the RBA, the labour market still likely needs to ease, to reduce pressure on inflation, to have confidence to achieve its CPI target,” Tharenou said.

HSBC also revised its forecast for next month to a rise, and said it also predicted a rate hike in the September quarter as well. Chief economist Paul Bloxham said he thought next month’s rate rise would be “painful,” because it was the result of the economy hitting limits in its capacity and weak productivity growth.

If the RBA raises rates next month, it would be the first increase in the cash rate since late 2023, after the central bank, led by governor Michele Bullock reduced rates three times in 2025. Even so, some economists are unconvinced there is a case to tighten monetary policy and they are predicting a period of stability for interest rates.

AMP deputy chief economist Diana Mousina said the implied odds of a rise in official interest rates in February had lifted from 26 per cent to 56 per cent after the figures were published. However, Mousina said AMP believed it was more likely the central bank would keep interest rates on hold for the forseeable future.

While a rate rise would be a blow to the government, Treasurer Jim Chalmers welcomed the jobs numbers as evidence Labor’s economic strategy was working.

“Our three big economic priorities for this year are addressing inflation, productivity, and global uncertainty, and our resilient labour market gives us a strong foundation to build on the progress we’ve already made,” he said.

The ABS said that alongside the jobs growth in December, there had also been a decline in underemployment, which refers to people who have work but want more hours. Underemployment – which economists see as an indicator of tightness in the labour market – fell 0.5 percentage points to 5.7 per cent.

ABS head of labour statistics, Sean Crick, noted the decline in underemployment had been more significant among younger workers. “Fewer young people were underemployed in December, with the 15- to 19-year-old underemployment rate falling by 2.1 percentage points to 17.4 per cent,” Crick said.

On the sharemarket, the ASX200 closed 0.8 per cent higher following a rally on Wall Street overnight, after US president Donald Trump dumped his threat to impose tariffs on several European countries because of their opposition to the US taking control of Greenland, saying he had a “framework for a future deal” on arctic security.

Financial stocks had a strong day, with Commonwealth Bank (up 2.3 per cent), Westpac (up 2.1 per cent), National Australia Bank (up 3 per cent) and ANZ Bank (up 0.6 per cent) all rising.

Among the miners, Rio Tinto added 0.6 per cent and BHP shed 0.8 per cent. Fortescue fell 5.1 per cent after it announced it shipped a record volume of iron ore in the six months to December 31. Gold miners retreated, with Northern Star falling 8.4 per cent and Evolution Mining dropping 4.6 per cent.

Energy stocks gained, with Woodside Energy rising 2.9 per cent, while Santos jumped 5.3 per cent as it lifted fourth-quarter production by 5 per cent.

On Wall Street overnight, the S&P 500 rallied 1.2 per cent after Trump said the deal, “if consummated, will be a great one for the United States of America” and its allies in the North Atlantic region. The announcement triggered an immediate move higher in the stock market, which found solace earlier in the day after Trump ratcheted down his rhetoric and told business and government leaders in Europe that he would not use force to take “the piece of ice”.

The de-escalation in tensions helped the S&P 500 recover just over half of its 2.1 per cent drop from the day before and pull closer to its all-time high set earlier this month. The Dow Jones Industrial Average jumped 588 points, or 1.2 per cent, and the Nasdaq composite climbed 1.2 per cent.

With AP

The Market Recap newsletter is a wrap of the day’s trading. Get it each weekday afternoon.