Australia’s unemployment rate ticked up slightly to 4% in December, a marginal rise from November’s 3.9%. This small shift has led some analysts to speculate that the Reserve Bank of Australia (RBA) might opt for a cash rate cut sooner than expected, potentially at its February meeting.

Jobs Data: A Strong Market with a Softer Edge

December saw stronger-than-expected employment growth, with 56,300 new jobs added, well above the 35,600 recorded in November. However, the rise in the participation rate meant more Australians were actively seeking work, resulting in a higher unemployment figure.

Despite the statistical uptick, the job market remains robust, underscoring resilience in Australia’s economy. But with inflation slowing and household spending dropping, the higher unemployment rate could tip the scales in favor of a rate cut.

Inflation Holds the Key

The December quarter Consumer Price Index (CPI), due on 29 January, is pivotal for the RBA’s decision. Economists, including those at ANZ, anticipate that trimmed mean inflation—the RBA’s preferred measure of underlying price pressures—will come in at 0.5% for the quarter, the lowest since mid-2021.

If this prediction holds, the annual trimmed mean inflation rate would fall to 3.2%, below the RBA’s forecast of 3.4%. ANZ has already adjusted its forecast, predicting a 25-basis point cut in February, joining Commonwealth Bank in expecting an early easing of monetary policy.

Household Spending Declines: Another Factor at Play

Adding to the case for a February rate cut is a notable drop in household spending. CommBank’s Household Spending Index fell by 1.8% in December, with declines in categories like hospitality (-2.6%), food and beverage (-2%), and recreation (-2%).

This dip, coupled with softer retail sales after a strong Black Friday period, underscores waning consumer confidence and further supports calls for a reduction in the cash rate.

Market Sentiment: Divided but Leaning Toward February

Financial markets currently price in a 73% likelihood of a rate cut at the RBA’s February meeting. While ANZ and Commonwealth Bank expect the first cut in February, NAB and Westpac remain cautious, predicting a move closer to May.

Regardless of the exact timing, the rising unemployment rate, softening household spending, and easing inflation create compelling conditions for a cut early in 2025.

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