Australia’s jobs picture is getting uglier

Australian January jobless rate hits decade high

Australia's employment picture continued to deteriorate in January as the job market showed further contraction, blurring the prospect of potential tightening by the central bank to rein in inflation.

The Australian Bureau of Statistics reported on Thursday that the number of people employed last month fell by 3,700, stunning analysts who were expecting a rise of 15,000, according to a Reuters poll.

(Read more: Australia stocks no longer expensive: Goldman)

The unemployment rate jumped to the highest level in more than a decade, rising to 6 percent in January from 5.8 percent in December and missing a Reuters forecast for 5.8 percent.

Australia's jobless rate has been creeping higher with dramatic job losses especially in the once-booming mining industry.

Job seekers at a jobs and skills expo run by the Australian government in Melbourne, Australia.
Carla Gottgens | Bloomberg | Getty Images

The trend appears to be spreading to other parts of the economy –Toyota announced earlier this week that it will stop producing cars in Australia by 2017, which will result in 2,500 job losses. Toyota's decision follows similar moves by Ford Motor and General Motors who will be exiting the country in the next few years.

"The labor market remains the weakest part of the Australian story," economists at HSBC wrote in a note. "Timely indicators, including housing approvals, retail sales and business conditions have all lifted in recent months, but this is yet to support hiring."

(Read more: Hold on tight, the Aussie rally may just be starting)

The Australia dollar was sharply lower on the news, tumbling more than half a U.S. cent to $0.8952.

"It's interesting reaction from the currencies. The currency market's telling you the rate decision's going to get pushed back again," said Sean Darby, chief global equity strategist at Jefferies, referring to recent speculation that the Reserve Bank of Australia (RBA) could begin a tightening phase to curb inflation, especially in its frothy housing market.

"Australia will still probably be on some form of a tightening phase given the inflationary outlook and may have to live with some deterioration in the jobs data in the short term," he added.

According to Chris Weston, chief market strategist at IG, the job report is unlikely to sway the RBA, given the lagging nature of the indicator.

(Read More: Is the euro headed for an Aussie-style crash?)

"The key for future [RBA] cuts now falls on the looming private capex figures and future inflation reads, however my view is that rates are on hold for some time to come," said Weston.

"Job advertisements have stabilized recently. We still expect that the RBA's easing phase is done," HSBC added, expecting jobs growth to lift in coming quarters.

— By CNBC's Li Anne Wong. Follow her on Twitter: @LiAnneCNBC