Australia’s labour market delivered an upside surprise in December, reigniting debate over whether the Reserve Bank of Australia (RBA) could resume tightening sooner than previously expected.
Employment rose by 65,200 jobs in December, sharply rebounding from a revised 21,300 decline in November and more than double market expectations of 30,000, according to consensus estimates cited by Reuters. The strength of the result pushed the unemployment rate down to 4.1% from 4.3%, defying forecasts for a rise to 4.4%.
The participation rate held steady at 66.7%, suggesting the fall in unemployment was driven by genuine labour demand rather than a contraction in the workforce.
The outcome reinforces the resilience of the jobs market at a time when the RBA remains highly sensitive to data that could influence the inflation outlook. The central bank’s most recent forecasts had unemployment rising to around 4.4% by the end of 2025, meaning December’s result places the labour market well ahead of those assumptions.
Reserve Bank governor Michele Bullock has previously said labour market data would be closely watched, given the role employment conditions play in driving wages growth and, ultimately, inflation.
The stronger-than-expected jobs report has already prompted a repricing in interest rate expectations. Following hotter-than-expected monthly inflation data in November, money markets were pricing in around a 30% probability of a rate hike at the RBA’s first meeting of the year in February. After Thursday’s labour force release, that probability has lifted to around 50%.
Markets react: AUD up, ASX steady
Market reaction was swift. According to IG, interest rate markets moved from pricing just 6 basis points of tightening for the February meeting to around 13.5 basis points, implying a 54% probability of a 25-basis-point hike to 3.85%. A cumulative 46 basis points of tightening is now priced between now and the end of 2026, although pricing remains volatile.
Currency markets also responded, with the Australian dollar rising to a 15-month high of 0.6793 against the US dollar, while equity markets were largely unfazed, with the ASX200 holding close to flat after initially trading higher earlier in the session.
ABS: youth employment helped drive gains
ABS head of labour statistics Sean Crick said the gains were broad-based, noting: "This month we saw more 15-24 year olds moving into employment, contributing to the rise in overall employment and the fall in the unemployment rate."
BDO: labour market tighter than RBA forecast
Economists say the data confirms the labour market remains tighter than the RBA had anticipated. BDO chief economist Anders Magnusson said December’s figures point to an economy operating near capacity.
“The 4.1% unemployment rate suggests the labour market is tighter than expected, indicating that spare capacity could be more limited than assumed in their current forecasts,” he said.
Magnusson noted that not only unemployment, but underemployment and underutilisation rates have also declined, further signalling labour market tightness.
“This release will make employment less of a focus at the February RBA board meeting, allowing inflation to dominate the discussion. The key data for that meeting will be the December-quarter CPI, which will give the RBA an updated read on price pressures following hotter than expected inflation in the September quarter.”
However, Magnusson said the data does not guarantee an imminent hike.
“I expect the RBA to hold the cash rate and continue to wait and watch for another month, rather than switch to a tightening cycle in February,” he said.
VanEck: high-for-longer risks building
VanEck head of investments and capital markets Russel Chesler said the labour data brings forward the risk of higher rates.
“We’re now closer to an RBA rate rise. The unemployment rate fell to 4.1% in December 2025 and while it’s good news that Australians are fully employed, this is another indicator of a robust economy and inflation levels that are still too high for the RBA,” he said.
Chesler pointed to broader economic strength, including consumer spending rising 6.3% year on year to November and property prices up 8.6% over 2025.
BNY APAC macro strategist Wee Khoon Chong said the result would likely shift market expectations.
“The strong jobs data today affirms RBA’s concern of a tight labour market and is likely to encourage the market to push forward the timing of an RBA interest rate hike,” he said.
What to watch next
The next key test for policymakers will be the December-quarter CPI, due next week, followed by the Wage Price Index later in February, both of which are expected to play a decisive role in shaping the RBA’s February 3 decision and the early-2026 policy outlook.