A bombshell revelation from the RBA has shaken up the financial world today! Two major banks predicted rate hikes in February, but fresh employment data has thrown a curveball. The ABS reports a surprising drop in unemployment, coupled with a tightening labor market, all amidst falling inflation. This unexpected turn of events has the potential to keep interest rate hikes on the table for the coming months.
The ABS' latest labor force statistics paint a promising picture: unemployment dropped to 4.1% in December, down from 4.3% in November. Jobs are on the rise, and underemployment is easing, indicating a tightening labor market. Experts suggest this stronger-than-expected labor market could lead to an interest rate hike as early as February.
But here's where it gets controversial...
RBA Governor Michele Bullock will make the next rates decision in February, and the interplay between the labor market and rates is complex. Typically, economists expect slower inflation pressures from the jobs market when unemployment is between 4.25% and 4.5%. However, the lower-than-expected unemployment rate hints at persistent inflation.
The new employment data arrives at a tricky time for monetary policymakers. Earlier this month, figures showed inflation dropped in November but remained above the RBA's target band of 2-3%. Expectations of a hike were growing in late 2025 due to stubborn inflation reported in October, but signs of easing inflation in January have tempered these predictions.
Markets are forecasting a 25% chance of an increase in the cash rate, down from a 36% chance at the start of January. VanEck's head of investments, Russel Chesler, believes the employment figures bring us closer to an RBA rate rise, and market expectations may shift.
Chesler highlights that while full employment is good news for Australians, it's another indicator of a robust economy with inflation levels still too high for the RBA's comfort. He adds perspective, noting that the unemployment rate was considerably higher at 6.2% ten years ago, and job ads, though fallen in the second half of 2025, remain above pre-COVID levels.
The current data suggests a rate rise sooner than the market anticipated. A modest rise in unemployment would have strengthened the case for a hold in the cash rate. AMP chief economist Shane Oliver warns that a rising unemployment rate would signal caution to the RBA, urging them not to raise rates too quickly.
Canstar insights director Sally Tindall emphasizes that the employment data will give the Reserve Bank much to consider next month. She adds that the RBA's role isn't just about keeping prices in check; it's also about ensuring Australia's jobs market remains strong. A sustained lift in unemployment could put a halt to future rate hikes.
However, the Board won't react to just one number. If they did, the cash rate would fluctuate wildly, causing chaos for borrowers, savers, and banks. Tindall cites the September 2025 spike in the unemployment rate from 4.2% to 4.5% as an example. The surprise jump sparked speculation of an RBA rate cut, but the RBA didn't react, making it clear they wouldn't change course based on one volatile dataset. The following month, the unemployment rate dropped again, and the spike was revised down by the ABS.
REA group economist Angus Moore believes the upcoming ABS inflation data release will be the most critical indicator of the RBA's rate direction. The RBA is focused on inflation, and next week's release will be a key factor in determining the February meeting's outcome.
Canstar analysis shows 53 lenders have increased fixed rates since the Reserve Bank's last meeting in December. This includes all the "big four" banks, who have raised fixed rates by up to 0.7%. Two lenders, Heritage Bank and People's Choice, have raised variable rates by 0.1% across six owner-occupier and investor loan products.
Nerida Conisbee, chief economist at Ray White Economics, suggests recent global tensions may strengthen the case for a hold. US President Donald Trump's threats over Greenland, later retracted, hint at an uncertain global economic environment. Tensions over trade just weeks before the RBA's February interest rate meeting could influence the RBA's caution.
And this is the part most people miss...
The RBA's decision is a delicate balance between economic indicators and global influences. While employment data is crucial, inflation remains a key focus. The upcoming inflation release will provide further clarity on the RBA's next move.
So, what do you think? Will the RBA raise rates in February, or will they hold steady? Share your thoughts in the comments below!
