Unemployment hits four-year high, heaping pressure on RBA to cut rates

Official interest rates could be cut within weeks after unemployment jumped to a four-year high of 4.5 per cent, with evidence emerging that the nation’s jobs market is deteriorating much faster than anticipated by the Reserve Bank.

Financial markets, which ahead of Thursday’s jobs market report put the chance of a rate cut at the RBA’s meeting in early November at less than 40 per cent, now believe there’s a two-in-three chance the Reserve Bank will slice the official cash rate to 3.35 per cent.

The Australian dollar fell almost half a cent against its US counterpart while the ASX 200 reached a fresh record high on expectations the RBA will have to cut rates to protect the economy.

Last month, bank governor Michele Bullock said it appeared that while unemployment had lifted a little this year, there was still tightness across the jobs market, which implied upward pressure on inflation.

Bank chief economist Sarah Hunter this week used a major speech in Sydney to argue underlying inflation may be stronger than expected, suggesting that “the labour market, and economic conditions more generally, remain a bit tighter than we had assessed”.

Instead, the Australian Bureau of Statistics found the jobless rate lifted by 0.2 percentage points to 4.5 per cent in September while revising up the unemployment rate in August. Underemployment – which tracks those who would like to work more hours – also lifted sharply.

While the number of people with a job increased by almost 15,000 last month, the number out of work rose by 33,000.

The rate of job creation has slowed sharply to 1.3 per cent, after starting the year at 3 per cent.

Unemployment is now above 4 per cent in every state and territory. It is highest in Victoria at 4.7 per cent, a 0.3 percentage point lift over the month.

But there are troubling signs in NSW, the nation’s largest jobs market. In the first nine months of last year, more than 57,000 jobs were created across the state. For the same period this year, it has lost 22,100.

By contrast, Victorian jobs growth over the same period has slowed from 111,000 to 63,600.

Even recent job powerhouses, Queensland and Western Australia are showing sharp slowdowns in employment growth. WA has added just 400 jobs so far this year.

Treasurer Jim Chalmers, in Washington for this week’s round of International Monetary Fund talks, said despite the increase, unemployment was still low, participation was high and 15,000 jobs had been created in September.

“With all the uncertainty coming at us from around the world, new jobs were still created, unemployment is still very low by historical standards, and participation is high, and that combination is one of our best defences against the difficult circumstances we confront,” he said.

But shadow treasurer Ted O’Brien said the jump in unemployment was due to excessive government spending.

“When government spending gets out of control, inflation remains sticky, leaving the RBA with no choice but to keep rates higher for longer,” he said.

The Reserve Bank, which is due to update its key economic forecasts next month, had expected the jobless rate to edge up to 4.3 per cent by year’s end. It also had employment growing by 1.6 per cent through 2025.

KPMG chief economist Brendan Rynne said the Reserve Bank should be more worried about the softening jobs market than “short-term fluctuations” in the inflation rate.

“At its upcoming meeting, the RBA should be looking bring the cash rate down to a more accommodating level to help businesses invest and encourage households to spend which should collectively help underpin the labour market,” he said.

AMP economist My Bui said that since the Reserve Bank’s last meeting, at which it held the cash rate steady and signalled concerns about inflation, there had been weaker-than-expected reports on consumer confidence, household spending intentions and building approvals.

She expects the bank to cut rates next month and follow that up with a further reduction at the RBA’s February 2026 meeting.

“The consumer sector is still rather fragile with purchases boosted by one-offs such as promotions or weather events, and with the labour market easing and wages growth stabilising, it is hard to see demand-led inflation a cause for concern for the Reserve Bank in the near future,” she said.

HSBC Australia chief economist Paul Bloxham said the jobs numbers bolstered the case for further reductions in interest rates.

“Today’s jobs figures were weaker than the market expected and showed that, what had only appeared to be a modest weakening in job creation in the past couple months, is now looking like a more convincing slowdown,” he said.

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