Forecasters were taken off guard by the resilience of Australia's labour market.
The unemployment rate fell to 4.1 per cent in December, the Australian Bureau of Statistics revealed on Thursday, smashing consensus estimates for the jobless rate to hold steady at 4.3 per cent.
Labour force data is typically volatile and will be viewed cautiously by the Reserve Bank.
But the latest figures won't ease RBA governor Michele Bullock's concerns that the labour market is still too tight for inflation to return to the central bank's two-three per cent target band given current monetary policy settings.
The fall in unemployment brings the average rate for the quarter down to 4.2 per cent.
The central bank's latest economic forecasts, released in November, predicted the unemployment rate would settle at 4.4 per cent for the period.
While employment growth had decelerated and job vacancy rates trended lower throughout 2025, Thursday's data showed the gradual rise in the unemployment rate since the middle of last year has stalled.
Following Thursday's data print, HSBC brought forward its rate hike forecast to the RBA's next meeting in February.
"With inflation above target, and a tightening (not loosening) jobs market, the case for the RBA to hike strengthens," said chief economist Paul Bloxham.
It was a remarkably strong report all round.
The drop in unemployment was driven by robust employment growth of 65,200 jobs, beating consensus predictions for a much more modest increase of about 28,000 jobs.
The participation rate rose slightly to 66.7 per cent, while the underemployment rate and underutilisation rates declined sharply.
But Harry Murphy Cruise, Oxford Economics Australia head of economic research, said it was important not to get carried away with just one data point, although "the odds of a rate hike are rising".
"Next week's inflation data will be the deciding factor," he said.
"The magic number for trimmed mean inflation is 3.2 per cent.
"Anything above that will warrant a hike when the RBA board next meets in early February. Anything at or below should be enough for the board to hold rates steady - at least until the next meeting."
Expectations for a rate hike have climbed in recent months since a resurgence in inflation.
Ahead of the release, money markets had fully priced in a 25-basis point increase by August, with traders implying about a quarter chance of a hike on February 3.
Following the release, markets swiftly repriced the odds of a February hike to around 60 per cent, according to IG markets analyst Tony Sycamore.
"The RBA's key concern here will be that this tightness will feed into wage growth and, more broadly, into inflation within an Australian economy where price pressures are already uncomfortably high," he said.
While a headache for the Reserve Bank, the strong jobs market is positive news for Australian workers.
Treasurer Jim Chalmers said it was good to see lower unemployment, higher participation and tens of thousands more jobs created.
"If there's a defining feature of this government, it's the strength of the labour market throughout our term in office," he said.
A near-one percentage point fall in youth unemployment was a major factor, indicating some seasonal "noise" during the holiday period might have played a factor in the results.
