The jobless rate fell to 4.1 per cent in December and 65,200 jobs were added to the economy, the Australian Bureau of Statistics revealed on Thursday.
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 the jobs market is still tight.
The December drop brings the average unemployment 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.
Thursday's result also wrong-footed the consensus of market economists, who had forecast the jobless rate to hold steady at 4.3 per cent.
Employment growth exceeded predictions for a much more modest increase of about 28,000 jobs.
While employment growth had decelerated and job vacancy rates trended lower throughout 2025, Thursday's data showed a gradual rise in the unemployment rate has stalled since mid-year.
Harry Murphy Cruise, Oxford Economics Australia head of economic research, said it was important not to get carried away with just one data point but "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 more than 50 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.
Despite a 30,000-person drop in unemployment, the bumper rise in employed people led to the participation rate rising slightly to 66.7 per cent, ABS head of labour statistics Sean Crick said.
"In December 2025, seasonally adjusted monthly hours worked reached a record high of over two billion hours for the first time," he said.
Treasurer Jim Chalmers said it was good to see lower unemployment, higher participation and tens of thousands more jobs created.
"This result is welcome and highlights the resilience of our labour market at a turbulent time for the global economy," he said.
A near-one percentage point fall in youth unemployment was a major factor, indicating some seasonality during the holiday period might have played a factor in the results.
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