Mixed signals from jobs and household demand have spurred debate over the cash rate path moving forward.
Australia’s unemployment rate edged lower in May while household spending rebounded sharply - prompting the big four banks to warn that stronger demand could spell further hikes.
The Australian Bureau of Statistics (ABS) reported that the seasonally adjusted unemployment rate fell by 0.1 percentage points to 4.4 per cent in May, with employment rising by 40,300 people to 14,738,800.
Full‑time employment increased modestly, up 5,200 to 10,140,800, while part‑time roles climbed by 35,200 to 4,598,000.
“Over the past few months, we have recorded higher proportions of unemployed people waiting to start jobs who then remained unemployed in the following month,” Sean Crick, ABS head of labour statistics said.
“The backlog of people waiting to start a job has eased in May, contributing to the 40,000 rise in employment and 18,000 fall in unemployed persons.”
Crick also pointed to slower underlying momentum in the labour market.
He said trend employment and hours worked each rose by 0.1 per cent in May, signalling that hiring was expanding - but at a more measured pace than during the post‑COVID snap‑back.
On the household side, the ABS reported that consumer spending in May rose 1.3 per cent in current prices, seasonally adjusted, and was 5.5 per cent higher than a year earlier.
That followed a 1.1 per cent fall in April and a 1.7 per cent rise in March.
Tom Lay, ABS head of business statistics, said the May rebound was broad‑based.
“The rise in household spending largely reversed what was seen in April, reflecting a lift across all nine spending categories,” Lay said.
Major banks see gradual softening yet diverge on rate trajectory
The big four banks framed the data as evidence of a cooling slowly, but said the figures were not yet weak enough to rule out further cash rate hikes.
Australia and New Zealand Banking Group (ANZ) argued that the labour figures sat comfortably within the Reserve Bank of Australia’s (RBA) current view of conditions.
“The labour force data is unlikely to materially sway the RBA’s assessment of the labour market in either direction, which it continues to view as ‘a little tight,” it said.
“Conditions appear broadly balanced, with signs of ongoing easing”, with the bank expecting unemployment to “drift higher, reaching a peak of around 4.8 per cent in late 2027.”
On consumption and rates, ANZ noted that the strong spending result was unlikely to prompt a knee‑jerk response.
"While the May spending data surprised to the upside, we expect the RBA to look through the noise” adding that it maintained its view “that the cash rate will remain on hold at the August meeting.”
Yet Westpac placed more emphasis on emerging weakness beneath the headline jobs numbers.
“The unemployment data suggests that while there has clearly been some noise in the data recently, there is genuine weakness forming underneath,” the bank said.
“The shock associated with the Middle East conflict and recent interest rate rises is almost certainly in train, and it will still take time to fully work its way through to the labour market.”
Westpac is forecasting the jobless rate to reach “a quarter‑average of 5 per cent in early 2027” and has retained its current forecast of two more cash rate hikes in August and September.
The Commonwealth Bank of Australia’s (CBA) economists meanwhile stressed that the jobless rate remained below the level the bank and the RBA considered consistent with full employment.
“At 4.4 per cent, the labour market remains a little tight and below our (and the RBA’s) estimate, yet it is creeping higher and is well above the RBA’s most recent forecast update which had the unemployment rate averaging 4.2 per cent in Q2 2026," it said.
“The gradual rise in trend unemployment will not be a major cause for concern for the RBA yet given it remains low by historic standards, below estimates of full employment and it is just one measure the RBA uses to judge full employment.”
However, it also warned that “given the headwinds facing the labour market amid a slowing economy, the RBA will likely be alert to the risks from here.”
On spending, CBA flagged a risk that demand may not cool as much as its models had assumed
“We have been highlighting that a key risk in our expectation for a slowdown in the economy is that household spending slows less than we expect, supported by healthy aggregate financial buffers,” it outlined.
“These figures highlights this risk, which if sustained could delay the easing of inflation expected and make the RBA uncomfortable.”
National Australia Bank’s (NAB) interpretation broadly supports the idea that the data reduces pressure for further tightening.
“Even after the data, unemployment is tracking above that forecast, which plays to the view the RBA will not be pushed by the data to tighten further,” NAB said.
“For now, unemployment a little higher than they forecast is welcome rather than a cause for concern because the RBA still considers labour market conditions a little tight.”
[Related: Underlying CPI jumps as majors diverge on outlook]
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