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Australia's labor market showed renewed strength in May as employment rebounded and the unemployment rate unexpectedly eased, reinforcing expectations that the Reserve Bank of Australia (RBA) could keep interest rates higher for longer if inflation remains persistent.
According to the Australian Bureau of Statistics (ABS), the economy added 40,300 jobs in May after a revised decline of 40,600 in April. The increase exceeded economists' expectations of 30,000 new positions, highlighting the resilience of Australia's labor market despite ongoing economic challenges.
The unemployment rate slipped to 4.4% from 4.5%, matching market forecasts, while the labor force participation rate edged up to 66.7%. The latest figures indicate that businesses continue to hire, even as higher borrowing costs and inflation weigh on the broader economy.
Additional data also revealed that Australian household spending recovered during May as travel activity returned to normal following a temporary slowdown in April linked to geopolitical tensions involving Iran. The rebound suggests consumer demand remains relatively strong despite elevated interest rates and rising fuel prices.
Market analysts believe the latest economic data reduces the likelihood of an immediate slowdown. Russel Chesler, Head of Investments at VanEck, noted that Australians continue to work and spend despite expectations of weakening economic momentum. He added that another interest rate increase remains a possibility if inflation pressures persist.
However, not all indicators pointed to strength. Total hours worked declined by 1.1% in May, while job vacancies fell 2.1% over the three months to May, marking the first quarterly decline since late last year. These figures suggest that parts of the labor market may gradually be cooling.
Financial markets showed little change in expectations for monetary policy. Investors currently assign roughly a 20% probability of an RBA rate hike in August, with only modest additional tightening expected before year-end.
The Reserve Bank of Australia has already raised its cash rate three times this year to 4.35%, reversing the policy easing introduced in 2025. While headline inflation eased to 4.0% in May, the trimmed mean inflation measure climbed to 3.6%, remaining above the RBA's target range of 2% to 3%. The central bank continues to describe the labor market as relatively tight and expects unemployment to gradually rise to around 4.7% by mid-2028 as inflation pressures slowly moderate.
