Australia’s Unemployment Rate Surprisingly Drops to 4.1%

Australian unemployment unexpectedly fell in December as the economy added more jobs than anticipated, buttressing the Reserve Bank’s view that the labor market remains tight ahead of February’s policy decision.

The jobless rate dropped to 4.1% from 4.3%, beating economists’ forecast of 4.3%, data from the Australian Bureau of Statistics showed Thursday. Employment advanced by 65,200, led by full-time roles, and easily exceeding the expected 27,000 gain.

Yields on policy sensitive three-year government bonds rose 4 basis points, while the currency climbed to its highest in more than a year. Money markets are now pricing an almost 40% chance of an interest-rate hike in February, up from less than one-third prior to the jobs print. Stocks pared gains.

The labor market reading, along with next week’s quarterly inflation print, are crucial data for policymakers ahead of the RBA’s Feb. 2-3 policy meeting. The central bank may be approaching an inflection point where it needs to decide whether to keep the key interest rate unchanged or pivot to a hike to help tame renewed inflationary pressures.

The RBA undertook a brief easing cycle between February and August last year when it cut the key rate by a total of 75 basis points to 3.6%. However, at the December policy meeting, Governor Michele Bullock said that further easing is unlikely in the near-term, and the next move could well be a hike.

Earlier this month, RBA Deputy Governor Andrew Hauser described inflation as “too high” and echoed Bullock’s remarks, saying Australians have probably seen the last cut of the easing cycle. At the same time, he signaled that the rate-setting board is taking a patient approach to controlling inflation.

The RBA operates under a dual mandate that aims for inflation to be at the midpoint of its 2-3% target while trying to keep the economy at maximum sustainable employment. The statistics bureau will release inflation data for the final three months of last year on Wednesday.

Other key points:

• Full-time roles surged by 54,800 and part-time positions gained 10,400

• The participation rate was 66.7%

• Underemployment dropped to 5.7% and under-utilization slid to 9.8%