Australia employment rebounds in May, jury still out on another rate hike

By Stella Qiu

SYDNEY, June 25 (Reuters) - Australian employment rebounded in May while the jobless rate ticked lower as expected, data showed on Thursday, a sign of resilience that could support a further lift in interest rates if needed to tame inflation.

Separate data showed household spending bounced back last month as travel returned to normal after a decline in April attributable to the U.S.-Israeli war on Iran, suggesting consumer demand was holding up in the face of higher borrowing costs and fuel prices.

Figures from the Australian Bureau of Statistics showed net employment rose 40,300 in May from April, when it fell a revised 40,600. That was above market expectations for an increase of 30,000, though it was balanced by the sharp downward revision to April.

The jobless rate dipped back to 4.4% from 4.5%, the highest since September 2025, as expected, while the participation rate edged up to 66.7%.

"The labour market bouncing back against yesterday's mixed inflation report allows the RBA to remain on an extended hold," said Krishna Bhimavarapu, APAC economist at State Street Investment Management.

"However, the bigger risk is still-sticky inflation that precludes it from coming back into the target zone. For this reason, we continue seeing a possibility of another hike later in the year."

The rise in jobs was largely expected, but there were signs of weakness as the gains were driven mostly by part-time positions. Hours worked fell a large 1.1% in May and job vacancies dropped 2.1% in the three months to May to mark the first decline since late last year.

OIL PRICES SLIDE

Overall, the mixed data did little to alter the near-term interest rate outlook. A move in August is still about 20% priced in, while there is about 12 basis points of tightening expected in November after the release of the third-quarter CPI report.

However, with oil prices now back to pre-war levels, markets are starting to price in a risk of rate cuts in the second half of next year. The Australian dollar slipped 0.2% to $0.6891 and 3-year government bond yields fell 4 basis points to 4.371%, the lowest point since March.

The Reserve Bank of Australia has raised interest rates three times this year to 4.35% in an effort to fight inflation, fully reversing the amount of policy easing made in 2025. Higher energy prices were still feeding through the economy, with underlying inflation pushing higher to 3.6% in May, well above a target band of 2% to 3%.

The labour market was also judged to be a "bit tight." The RBA had expected the unemployment rate to tick higher to 4.7% by mid-2028.

"Today's data is a signal that conditions in the economy are still inflationary," said Diana Mousina, deputy chief economist at AMP.

"Good employment outcomes keep household income elevated, which is lifting consumer spending, despite the challenges with higher energy and other prices."

(Reporting by Stella Qiu and Wayne Cole; Editing by Muralikumar Anantharaman, Shri Navaratnam and Thomas Derpinghaus)