Australia's jobless rate surprised by falling to a 33-year low of 4.1 percent in January, adding to concerns the drum-tight labor market was stoking inflation and cementing the case for an urgent rise in interest rates.
The Australian dollar jumped above 90 U.S. cents while bill futures slid as investors bet the Reserve Bank of Australia (RBA) would follow up last week's rate rise with another in March, the first back-to-back tightening since 2003.
"The jobs machine continues to churn out at full tilt," said Michael Blythe, chief economist at Commonwealth Bank. "The new low in unemployment is clearly something that will keep those
Reserve Bank inflation concerns alive and their fingers firmly on the interest rate trigger," he added.
Thursday's report from the government showed 26,800 net new jobs were created in January, beating forecasts for a 15,000 gain and brought the increase over the year to January to a rousing 280,800.
The fall in the jobless rate to 4.1 percent also confounded analysts' expectations of an unchanged 4.3 percent. That was the lowest reading since the monthly series began and you have to go back to 1974 for a lower quarterly reading.
Furthermore, job advertising remains strong and vacancy rates are at record highs, heralding further strength ahead. "These figures tell you that employment is incredibly strong," said Brian
Redican, a senior economist at Macquarie Bank.
While great for workers, that was not good news for the central bank which is struggling to cool an over-heating economy and contain an alarming outbreak of inflation.
The RBA has long harbored concerns that an ever-tightening labor market is driving up wages and adding to inflation pressures.
Wage growth had been surprisingly restrained in recent years, running at around an annual 4 percent and below the 4.5 percent threshold that analysts see as a threat to inflation.
But the RBA sounded a new alarm on wages in its quarterly policy outlook this week, warning that "growth in labor costs has been running at a higher level than is consistent with inflation remaining near the center of the target range".
The central bank also sounded increasingly concerned that rising inflation expectations could feed into yet higher wage claims, leading to a damaging wage-price spiral.
"The RBA's general concern about inflation pressures boils down to a worry that unemployment has fallen "too far" and wages growth is accelerating in an unsustainable way," said Rory Robertson, an interest rate strategist at Macquarie.
Thus the aim of higher interest rates would be to dampen domestic demand and push unemployment back towards 5 percent.
"That will be quite painful for some, but reversing any recent downshift in unemployment is the standard way by which central banks everywhere work to remove excessive wage and price pressures," added Robertson.
Indeed, getting the jobless rate up so far suggested that more than one more rate rise might be needed.
"We now would expect another tightening in March and, given the Reserve Bank's comments, there would be a high probability of May as well, depending on the data flow and global market developments," said Stephen Halmarick, co-head of market economics at Citi.