Australia's jobless rate hits 4.5%, easing RBA rate hike pressure

Australia's labour market showed unexpected weakness in July, with employment falling by 15,800 people when economists had forecast a gain of 15,000. The jobless rate climbed to 4.5%, marking the highest level since late 2021 and arriving faster than the Reserve Bank of Australia had anticipated. The data landed on Thursday with immediate market consequences: the Australian dollar dropped 0.2% to $0.7111, and traders began repricing their expectations for monetary policy.

The Reserve Bank had expected unemployment to reach 4.5% by year's end. Instead, it arrived in July. The broader picture of the labour market told a story of softening momentum. While full-time employment did rise by 16,300 positions, the overall decline reflected weakness in part-time work. The participation rate—the share of the population actively working or seeking work—eased to 66.9% from 67%. Hours worked fell 0.6%. The underemployment rate, which captures people working fewer hours than they want, held steady at 6.4%, a two-year high.

The timing matters because the RBA had just held its policy rate at 4.35% the week before, after three increases earlier in the year. The central bank's decision to pause reflected a judgment that the labour market had begun to cool. This employment report reinforced that view. Ben Udy, lead economist for Oxford Economics Australia, noted that the softer data, combined with moderate wage growth reported the day before, removed urgency from any near-term rate decision. Markets now price almost no chance of a hike next month, though a move by year's end remains a genuine possibility—viewed as roughly a coin toss.

Yet the RBA's language carries a warning. Policymakers have signalled that further tightening cannot be ruled out if inflation risks materialise. They point to three sources of concern: geopolitical tension, particularly the U.S.-Israeli conflict with Iran; the global artificial intelligence boom and its unpredictable economic effects; and Australia's productivity challenges, which have constrained the economy's potential growth rate. Krishna Bhimavarapu, an economist at State Street, emphasised that the bigger risks are coming from offshore. Bond yields are rising globally, financial conditions are tightening, and an El Niño weather event could damage Australia's wheat harvest, creating an inflation shock at a moment when the economy is already in transition.

The monthly jobs figures have proven volatile in recent months, with past increases revised substantially. That volatility means a single month of weakness does not necessarily signal a sustained deterioration. But the direction is clear: the labour market that was running hot through much of 2024 is cooling. For now, that takes pressure off the RBA to act. Whether that remains true depends on what happens beyond Australia's borders—and whether the weather cooperates.