Tight jobs market pushes RBA closer to February interest rate hike

December Employment Surge Defies Expectations

In December 2024, Australia’s labour market demonstrated notable strength, with employment rising by 65,000—more than offsetting November’s 29,000 decline. This sharp rebound pushed the unemployment rate down to 4.1%, well below the market consensus of 4.4%. Such figures indicate a labour market that is not only resilient but also tightening, contrary to some earlier predictions of a cooling phase.

The Australian Bureau of Statistics (ABS) highlighted that the increase in employment was driven significantly by a rise in jobs among 15-24-year-olds. This youth employment boost contributed to the overall employment growth and helped reduce the unemployment rate, signaling improved opportunities for younger Australians in the job market.

While monthly employment data can be volatile, experts like CreditorWatch Chief Economist Ivan Colhoun emphasize that the broader trend points to sustained strength. The December spike aligns with the view that the Australian labour market remains robust, with positive job growth and low unemployment levels continuing to prevail.

Underemployment and Youth Unemployment Trends

Beyond headline employment numbers, underemployment—a measure of workers wanting more hours—dropped sharply to 5.7% in December, reversing the unusual rise recorded the previous month. This decline suggests that more Australians are moving into full-time or fuller part-time work, reducing labour market slack.

Youth unemployment also saw a significant improvement, falling by 0.9 percentage points to 9.1%. This decline is particularly noteworthy given that younger workers often face higher unemployment rates and are more vulnerable during economic shifts.

These trends collectively highlight a tightening labour market where not only are more people employed, but the quality and quantity of employment are improving. This dynamic adds further complexity to the RBA’s monetary policy considerations.

Unemployment Rates Below RBA’s Equilibrium Estimates

The December quarter’s average unemployment rate of 4.2% came in below the RBA’s November forecast of 4.4% and well under the estimated non-accelerating inflation rate of unemployment (NAIRU) at 4.5%. This suggests the labour market is operating tighter than the central bank anticipated, potentially fueling inflationary pressures.

State-level data underscores this tightness, with New South Wales, Queensland, Western Australia, South Australia, and the Northern Territory all reporting seasonally adjusted unemployment rates of 3.9% in December. Even Victoria, traditionally higher in unemployment, saw a 0.2 percentage point drop, reflecting a nationwide trend.

Such low unemployment rates mean the labour market may be overheating, which typically prompts central banks like the RBA to consider interest rate hikes to prevent inflation from escalating further.

Implications for RBA’s Monetary Policy Stance

The unexpectedly strong labour market data complicates the RBA’s monetary policy outlook. A tight jobs market often translates into wage growth and increased consumer spending, both of which can stoke inflation. Consequently, the RBA is under pressure to act prudently to keep inflation within its 2-3% target range.

Economists increasingly predict a 25 basis point rate hike at the RBA’s February meeting, a move that would mark a continuation of the bank’s efforts to balance economic growth with inflation control. CreditorWatch’s Ivan Colhoun remarks that the data makes it difficult to argue against such a rate increase, especially given partial inflation indicators already observed this quarter.

However, the RBA must also consider the volatility inherent in monthly employment data and assess broader economic signals, including upcoming trimmed mean CPI figures, before finalizing its decision.

Market Reactions and Rate Hike Expectations

Financial markets responded swiftly to the December employment data. Prior to the release, the probability of an RBA rate hike in February was estimated at just 25%. Following the data, this expectation surged to roughly 50%, reflecting heightened investor confidence that the central bank will act soon.

Major Australian banks, such as Commonwealth Bank and NAB, are positioning for a 0.25 percentage point increase in the cash rate to 3.85% at the upcoming meeting. These institutions base their forecasts on the continued momentum in economic activity and persistent inflationary pressures.

Commonwealth Bank’s Head of Australian Economics, Belinda Allen, noted that the economy has gathered more momentum than expected, which has slowed inflation’s ease. A measured rate hike in February could help steer inflation back toward the RBA’s target band, maintaining economic stability.

Regional Labour Market Dynamics

Examining state-level labour market conditions reveals even tighter employment environments in several regions. States like New South Wales and Queensland, as well as Western Australia and South Australia, all reported unemployment rates near 3.9%, signaling strong labour demand.

The Northern Territory also recorded similarly low unemployment, reflecting a buoyant regional economy that is contributing to the national picture of tight labour supply. These regional disparities are crucial for the RBA to consider, as they influence wage pressures and consumer spending patterns differently across Australia.

Victoria, historically lagging in employment recovery, experienced a modest improvement, which may indicate broader national economic resilience. Such data points reinforce the notion that the labour market is broadly tight, supporting arguments for monetary tightening.

Key Economic Indicators to Watch Ahead of the February Meeting

While December employment data sets the stage, the RBA will closely monitor upcoming economic indicators before deciding on interest rates. The trimmed mean Consumer Price Index (CPI) for the December quarter, due in late January, will be pivotal in assessing underlying inflation trends.

A trimmed mean CPI reading around 0.9% quarter-on-quarter would solidify expectations of persistent inflation, likely prompting the RBA to raise rates. Conversely, a lower-than-expected CPI could give the bank room to pause or moderate its tightening.

Other factors, such as wage growth, consumer confidence, and global economic conditions, will also influence the RBA’s assessment. The central bank’s challenge lies in balancing these complex signals to support sustainable economic growth.

Balancing Inflation Control With Economic Growth

The RBA’s primary mandate includes maintaining price stability while supporting employment and economic growth. With the labour market tighter than anticipated, wage pressures could lead to sustained inflation, necessitating monetary tightening through interest rate hikes.

However, raising rates too aggressively risks dampening consumer spending and investment, potentially slowing the economy. The RBA must carefully calibrate its policy to avoid tipping the economy into recession while managing inflation expectations.

As Australia enters 2025, the interplay between a strong labour market, inflation dynamics, and global economic uncertainties will define the RBA’s policy path. Close monitoring and adaptive strategies will be essential to navigating this complex environment.

Conclusion

The robust Australian labour market at the end of 2024 has significantly shifted the Reserve Bank of Australia’s monetary policy outlook. With unemployment rates falling below key thresholds and employment surging, the RBA faces mounting pressure to raise interest rates to contain inflation. While monthly data volatility warrants caution, the broader trends point to a tightening jobs market that could stoke wage growth and consumer spending. As the RBA approaches its February meeting, all eyes will be on the trimmed mean CPI and other economic indicators to determine the appropriate policy response. Ultimately, the central bank must carefully balance the dual objectives of taming inflation without undermining the nation’s economic momentum.