Australia’s labour market ended 2025 with renewed momentum, reinforcing expectations that the Reserve Bank of Australia (RBA) may resume tightening as early as February. Fresh data from the Australian Bureau of Statistics (ABS) shows employment rebounding strongly, with implications for interest rates, borrowers, and the broader economy.
Jobs Bounce Back After a Soft November
In December, 65,200 jobs were added, marking a sharp recovery from November’s weaker result. Importantly, the bulk of this growth came from full-time employment, signalling genuine strength rather than short-term or casual hiring.
The participation rate increased to 66.7%, suggesting more Australians are either working or actively seeking work—another sign of confidence in labour market conditions.
Unemployment at a Seven-Month Low
The unemployment rate fell to 4.1%, its lowest level in seven months. While monthly data can be volatile, trend figures—which smooth out short-term fluctuations—also showed improvement. Trend unemployment eased to 4.2%, with more than 100,000 jobs added in the second half of 2025.
This combination of rising employment and falling unemployment highlights a labour market that remains resilient despite higher interest rates and cost-of-living pressures.
Why This Matters for Interest Rates
According to CBA Economist Harry Ottley, the strength in employment adds weight to expectations of a February RBA rate hike, potentially taking the cash rate to 3.85%.
A tight labour market increases the risk of persistent inflation, particularly through wage growth. From the RBA’s perspective, strong employment reduces the urgency to stimulate the economy and instead raises concerns about inflation staying higher for longer.
Ottley also cautioned that if labour market strength continues into 2026, further rate hikes cannot be ruled out.
The Next Key Test: Inflation Data
While employment is a major input into RBA decisions, inflation remains the primary target. The next critical data point will be the December quarter Consumer Price Index (CPI), due for release on 28 January.
If inflation proves sticky—especially in services—and employment growth remains solid, the case for additional tightening later in the year will strengthen.
As Ottley noted, the labour market is already “too tight for comfort” for the RBA.
What This Means for Borrowers and Businesses
For borrowers, particularly those on variable rates or approaching fixed-rate expiries, the outlook suggests interest rate relief may still be some distance away.
For businesses, continued labour shortages could keep wage pressures elevated, affecting margins and pricing decisions.
For investors, especially in property and equities, employment data is becoming just as important as inflation when assessing future rate movements.
Final Thoughts
Australia’s strong finish to 2025 has reshaped expectations for monetary policy in early 2026. With unemployment at 4.1%, job vacancies still high, and inflation yet to convincingly return to target, the RBA is likely to remain cautious—and potentially hawkish.
The upcoming CPI release will be pivotal, but for now, the labour market is clearly sending one message: the economy is running hotter than the RBA would like.
