HSBC, Bank of America expect February rate hike following shock jobs data
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More news: Economists at HSBC and Bank of America (BofA) have both brought forward their expectations for an interest rate hike following a surprise surge in employment in the December quarter.
HSBC chief economist Paul Bloxham, who previously tipped rates to rise in Q3 of 2026, now expects a February increase. He also flagged expectations of a further hike in Q3 2026 before a pause.
“Although we had thought the RBA may have been able to look through the higher core inflation readings and still forecast core inflation heading back to its target, this view relied on the central bank being able to argue that the loosening jobs market would deliver disinflation over time,” Bloxham said in a research note.
“Today's jobs figures mean that it is very hard to argue that the jobs market is loosening. In particular, the unemployment rate is falling and is well below the RBA's own estimates of 'full employment'.”
BofA Australia and New Zealand economists Nick Stenner and Johnny Liu previously expected an interest rate pause at the RBA monetary policy board’s first meeting of the year in February.
While they now expect a hike in February, they said “it's a close call that hinges on the 4Q CPI and RBA's updated forecasts”.
“Our previous forecast for the RBA to remain on hold through 2026 rested on a weaker labour market putting downwards pressure on medium-run inflation, but recent trends point to a stronger labour market and private demand,” the BofA economists said.
UBS now expects RBA to hike rates in February
More news: UBS economists are now predicting the RBA will hike interest rates at its February 2026 meeting as a shock decline in the unemployment rate for December suggests the labour market is “tightening, not easing”.
They had previously forecast a rate hike before the second quarter of 2026. In a research note, UBS economists George Tharenou and Stephen Wu flagged that while employment appeared to slow in the last year, wage income surprisingly re-accelerated.
“Now the unemployment rate and underutilisation rate fell. Together, this suggests the labour market is tightening, rather than easing,” the economists said.
“For the RBA, the labour market still likely needs to ease, to reduce pressure on inflation, to have confidence to achieve its CPI target. At the moment, it's going the wrong way.”
Westpac economist Ryan Wells said in a research note that an apparent “gradual rise in the unemployment rate came to a halt late last year”, but the trend in the underemployment rate suggests a “‘stable’ rather than ‘softening’ labour market”.
“The underemployment rate has been bumping around a bit more month-to-month recently, but it has held steady around 5.9% on a quarter-average basis over 2025,” Wells said.
ANZ head of Australian economics Adam Boyton and economist Aaron Luk also suggested that the “decline in the unemployment rate in December marks the start of a new trend given the softness in measures of labour demand” and expect the RBA to remain on hold in February.
Surprise December employment boost heightens RBA rate hike pressure
More news: The urgency of an RBA interest rate hike has compounded as the employment rate in December dropped to 4.1%, contrary to economist expectations that the labour market would ease.
Oxford Economics head of economic research and global trade Harry Cruise said the labour market “had a bumper run” in December with the creation of 65,200 new jobs, as hours worked surged by two billion and youth unemployment fell nearly one percentage point.
Despite entering 2026 with expectations that hiring would slow, pushing unemployment to 4.6% by mid-year, Cruise said “the jobs market is digging in its heels”.
"Absent our forecast rise in unemployment, an interest rate hike may be needed to tame the resurgence of inflation,” Cruise said.
“We won't jump on one data point, but the odds of a rate hike are rising. Next week's inflation data will be the deciding factor. The magic number for trimmed mean inflation is 3.2%. Anything above that will warrant a hike when the RBA board next meets in early February.”
Financial services firm BNY APAC macro strategist Wee Khoon Chong said “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”.
Moody's Analytics head of Australian Economics Sunny Nguyen said: "firms are still absorbing labour supply and leaning on existing workers. This is the opposite of the story that would naturally ease inflation pressure".
Consultancy KPMG chief economist Brendan Rynne said that usually the bulk of new jobs generated in December are part time, but this time 55,000 of the new jobs were full time.
While this makes the data “even more significant”, Rynne said the RBA will probably not be surprised as “it is well aware that it is inflation not the labour market that is the ongoing issue driving interest rate uncertainty”. As such, KPMG continues to expect the RBA to hold rates at upcoming meeting in February.
Meanwhile, Treasurer Jim Chalmers welcomed the low unemployment figures and said it “highlights the resilience of our labour market at a turbulent time for the global economy”.
“We’ve maintained low unemployment, high participation, strong wage growth, and overseen the creation of more than 1.2 million new jobs, and over four in five of these have been in the private sector,” Chalmers said in a statement.
He said the resilient labour market serves as a “strong foundation” to deliver the government’s “three big economic priorities” of fighting inflation, boosting productivity and weathering global uncertainty.
Chalmers will deliver a press conference in Canberra, alongside Employment Minister Amanda Rishworth, at 1pm AEDT.
Unemployment rate fell to 4.1% in December
The news: The unemployment rate fell to 4.1% in December, from 4.3% in November, in seasonally adjusted terms. This will surprise some economists, with many expecting the labour market to ease slightly.
Consensus expectations were for the unemployment rate to lift by 0.1 percentage points to 4.4%, with an addition of about 30,000 jobs and a participation rate of 66.8%.
The numbers: The number of employed people rose by 65,000. Full-time employment rose by about 55,000 people while the number of people in part-time employment rose by 10,000.
The underemployment rate remained at 5.9% while the underutilisation rate remained at 10.1%.
The participation rate was 66.7% and the number of hours worked increased by 0.4%.
The context: ABS head of labour statistics Sean Crick said "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".
The RBA’s monetary policy board called out in December that “labour market conditions remained a little tight”, which adds to the risk that interest rates would need to be increased.
They also noted that signs of the unwinding of factors that had sparked a rise in the unemployment rate ahead of the board’s November meeting “reduced the risk of a material easing in labour market conditions”.
However, monthly labour force figures have been volatile in recent months and some economists have warned against over-interpreting the figures ahead of the RBA's first rate decision of the year.
Inflation has returned in 2026 although whether it is being driven by persistent structural pressures or temporary factors is contested by economists. Persistent inflation would also add to the risk of an interest rate hike.
The International Monetary Fund flagged that Australia is “projected to see some drawn-out persistence in above-target inflation”, although headline consumer price index growth for November was slower than expected.
The sources: ABS media release, ABS data
