Shock jobless rate jump makes August rate cut a near certainty

A shock unemployment result has all but cemented an interest rate cut when the RBA announces its decision on 12 August.

Financial markets are pricing in an 85 per cent chance that the official cash rate will be cut from 3.85 per cent, after the surprise decision to keep rates on hold at the Reserve Bank’s July meeting.

Australia’s unemployment rate was expected to hold steady but it bounced up by 0.2 percentage points 4.3 per cent in June, according to figures released Thursday (17 July) by the Australian Bureau of Statistics (ABS).

Unemployment is now at its highest level since January 2022. It is still historically low, and pre-Covid was above 5 per cent for more than a decade.

Sean Crick, ABS Head of Labour Statistics said, “This month we saw the unemployment rate rise, driven by a 34,000 increase in the number of unemployed people.”

“This month we saw a decrease in full time hours worked, down 1.3 per cent, associated with a 0.4 per cent fall in full time employees,” Mr Crick said.

The uptick appears sure to force the RBA’s hand next month.

Currency traders certainly saw it that way, immediately sending the Aussie dollar nosediving below 65 US cents and similarly down against almost all other currencies. Lower interest rates make the Australian dollar less attractive to overseas buyers of the currency.

Three-year government bond yields also slid 10 basis points to 3.39 per cent as markets ramped up the odds of an August rate cut to 85 per cent, from 76 per cent previously.

Harry Murphy Cruise, Head of Economic Research at Oxford Economics Australia, said the RBA risked falling behind on the pace of rate cuts.

“While we’re still not ringing the alarm bells, June’s (labour force) slackening is another good reason for the RBA to get a wriggle on with rate cuts.”

“Looking ahead, the labour market has a number of challenges nipping at its heels; first and foremost, President Trump’s tariffs are weighing on business investment and prompting some firms to rethink hiring plans.”

The resilience of labour markets was outlined as one of the prime motivators for the RBA to keep rates on hold on 8 July, after cutting twice earlier in the year. The latest employment figures now undermine that rationale.

Construction sector in need of a cut

If interest rate cuts do materialise, it would be good news for the struggling construction sector.

A sharp drop in building approvals in the first quarter of 2025, according to data released Wednesday (16 July), could be steadied with further rate cuts that would encourage the public to re-enter the new home market.

New data from the Australian Bureau of Statistics (ABS) reveals 43,517 dwellings were completed in the March quarter in seasonally adjusted terms, down 4.7 per cent from a year earlier. That also compares to more than 47,000 dwellings completed in March 2020 and around 45,600 in March 2021. 

Simon Arraj, Manager, Vado Private, said lower rates could stimulate construction activity and help to lift housing supply in Australia’s biggest cities, which face a crucial shortage of homes.

“While we are still seeing lower building approvals for dwellings compared to four or five years ago, the restriction in housing supply could ease if interest rates continue to fall. This could encourage greater housing construction, which is essential to alleviating the shortage of housing accommodation in Australia,” Mr Arraj said.

“Having said that, new housing supply is currently near decade lows, with only 177,000 new homes completed in 2024,” he said.  

The lacklustre figures come as Australia marks one year into the five-year National Housing Accord, in which states and territories must build a combined 1.2 million well-located homes by mid-2029.

“Given this housing shortage, we could see further gains in property prices in Australia over the reminder of the year, especially if the central bank cuts interest rates again,” Mr Arraj said.

“Whether this happens is not clear.

“The central bank may not want to risk re-igniting inflation, and therefore it could keep interest rates on hold in the second half of 2025; the RBA’s inflation target of 2 per cent to 3 per cent remains a key focus,” he said.

New homes sales recovering

In better news for the housing sector, sales of new detached homes increased by 18.8 per cent in the three months to June 2025 compared to the previous three months. It was the strongest performance for new home sales in almost three years.

HIA Chief Economist, Tim Reardon, said the HIA New Home Sales report, a monthly survey of the largest volume home builders in the five largest states, said the overall quarterly rise came despite a fall in new home sales in the most recent month in New South Wales, Victoria and Western Australia.

“The increase in new home sales is supported by low levels of unemployment, recovering real wages and elevated housing demand from ongoing population growth,” Mr Reardon said.

“Despite this increase the volume of sales in New South Wales and Victoria remain very low, with elevated land costs holding back Australia’s largest states for longer than the more affordable states.

“Sales increased in the month of June in Queensland and South Australia to push them to multi-year highs.

“Western Australia’s builders continue to be constrained by labour shortages, preventing them from taking on more work despite ongoing strong demand for housing.”

The ongoing $10,000 incentive for construction workers to relocate to Western Australia attempts to resolve this issue, he said.

“Despite expected further cuts to the cash rate and a recovery in market confidence, there remains a shortage of housing in Australia due to the tax and regulatory barriers to increasing supply,” concluded Mr Reardon.

All states had increased new home sales in the June quarter 2025 compared to the previous quarter led by Victoria (+27.7 per cent). This was followed by Queensland (+26.2 per cent), Western Australia (+11.3 per cent), South Australia (+9.9 per cent) and New South Wales (+9.3 per cent).