Strong Jobs Data Throws RBA Rate Decision into Sharp Relief

SYDNEY, 28 January 2026 – Australia’s labour market delivered a powerful surprise to close out 2025, with unemployment falling unexpectedly to 4.1% in December. The robust figures have immediately intensified the policy dilemma facing the Reserve Bank of Australia, forcing economists to recalibrate the odds of an interest rate hike when the board meets next week.

Labour Market Defies Expectations

According to the Australian Bureau of Statistics, seasonally adjusted employment surged by 65,200 people in December, dramatically outperforming market forecasts of a 30,000 gain. The increase was driven by a strong rebound in full-time positions, which rose by 54,800. Consequently, the unemployment rate fell 0.2 percentage points to 4.1%, its lowest level in seven months and well below the 4.4% consensus expectation. The participation rate edged higher to 66.7%.

ABS head of labour statistics Sean Crick noted the improvement was partly driven by more young people aged 15 to 24 moving into employment. The total number of hours worked across the economy also reached a new monthly record, surpassing 2 billion hours.

Inflationary Pressures Linger

The strong labour data arrives amid persistent cost-of-living pressures. The latest Consumer Price Index data showed annual inflation running at 3.4% in the year to November 2025, still above the RBA’s 2-3% target band. This combination of falling unemployment and above-target inflation presents a clear challenge for the central bank, which has held the official cash rate steady at 3.6% since August 2025.

The December quarter inflation data, a critical input for the RBA’s February decision, is due for release imminently. Analysts at Oxford Economics Australia suggest a trimmed mean inflation reading above 3.2% would likely “warrant a hike”.

Key Economic Indicators at a Glance

Analysts Weigh In on Rate Hike Probability

The jobs report has triggered a swift reassessment in financial markets. Prior to its release, money markets implied roughly a 25-30% chance of a rate increase at the RBA’s 3-4 February meeting. Following the data, that probability jumped to around 60%, according to several market analysts.

“With inflation above target, and a tightening (not loosening) jobs market, the case for the RBA to hike strengthens,” said HSBC chief economist Paul Bloxham, who brought forward his rate hike forecast to February. Commonwealth Bank economist Harry Ottley echoed the sentiment, stating the strong job market “lends additional support to our call for a February rate hike”.

However, a note of caution was struck by Deloitte Access Economics in its quarterly Business Outlook released last week. Partner Stephen Smith argued that the recent re-acceleration in inflation was likely due to temporary factors and that an increase in February would be “premature”. Deloitte forecasts the economy to grow by 2.1% in 2026 and expects the first rate cut to occur in August.

The Broader Economic Picture

Beyond the immediate jobs-inflation standoff, the economy is navigating a complex transition. Headline GDP growth remains resilient at 2.1%, yet on a per-person basis, growth is stagnant as the population continues to expand rapidly, surpassing 27.6 million. Household spending has remained strong, rising 1.0% in November, but the “household squeeze” from high costs and mortgage repayments is a persistent theme.

The government has emphasised the labour market’s strength as a defining achievement. Treasurer Jim Chalmers said it was “good to see lower unemployment, higher participation and tens of thousands more jobs created.”

Frequently Asked Questions

Will the RBA definitely raise interest rates in February?

Not definitely, but the probability has increased significantly. The decision is now considered a “line ball call” and will heavily depend on the upcoming December quarter inflation data. A high underlying inflation reading would make a hike very likely.

What would a rate hike mean for mortgage holders?

For variable-rate mortgage holders, a 0.25 percentage point increase would mean higher monthly repayments. For example, on a $500,000 loan, monthly repayments could increase by approximately $75. This would add further pressure to household budgets already strained by the high cost of living.

Is the Australian economy in good shape?

The economy presents a mixed picture. The labour market is remarkably strong, and overall economic output is growing. However, this growth is not translating into higher living standards on a per-person basis due to rapid population growth, and inflation remains stubbornly above the RBA’s comfort zone.