Jobless rate hits five-year high as participation climbs, but economists and markets still expect a September cash rate rise

Australia's unemployment rate rose to 4.6% in August, its highest level in five years, but economists at two of the big four banks say the jump will not stop the Reserve Bank of Australia (RBA) lifting the cash rate next Tuesday.

The reading was the highest since November 2021.However, markets are still pricing roughly a 95% chance of a 25-basis-point hike next Tuesday.

The Australian Bureau of Statistics (ABS) August labour force release showed the seasonally adjusted unemployment rate rose from 4.5% in July. The number of unemployed people increased by 28,200 to 722,900.

Why the jobless rate rose despite stronger hiring

The headline rise came from more Australians looking for work, not from job losses. The participation rate increased by 0.2 percentage points to 67.1%, matching its highest level on record.

ABS head of labour statistics Sean Crick said August saw a higher proportion of people "previously not in the labour force moving to being unemployed" compared with recent years.

The quality of the jobs added was mixed. Part-time employment rose by 46,000 people in August, while full-time employment fell by 6,000 people. Hours worked rose 0.7%, and the underemployment rate fell to 6.2%.

Commonwealth Bank CBA senior economist Ashwin Clarke said cost-of-living pressures were pushing more people into the workforce.

"The increase in the participation rate has likely been supported by the uptick in inflation and interest rates, as households seek to recoup some of their lower real incomes by working more," Clarke said. "Employment growth and other labour market indicators remain solid and there are no signs of a sharp deterioration."

ANZ senior economist Jasmine Zheng urged caution in reading too much into the monthly figures, since the ABS has flagged that its new survey collection model could have an unintended impact on August 2026 estimates.

"While the headline employment gain appears firm, we think the broader signal from the release is one of gradual labour market easing," Zheng said. "The rise in the unemployment rate is consistent with a labour market that is becoming less tight over time and will ultimately help to reduce inflationary pressures."

Major banks hold firm on September hike calls

Both banks said the data would not shift the RBA's decision.

"As far as next week's RBA Board meeting is concerned, we don't think this release will change the likely decision (we expect a 25bp increase)," Zheng said.

Clarke agreed. "The unemployment rate is now tracking slightly higher than both we and the RBA expected. But this is unlikely to materially change the discussion at the Monetary Policy Board meeting next.”

A 25-basis-point move would lift the cash rate from 4.35% to 4.6%. With all four major banks now tipping a September hike, the debate has shifted to what comes next. ANZ expects a further 25 basis point increase in November.

"Despite the signs that labour market tightness is gradually unwinding, inflation pressures remain persistent and higher oil prices present an additional upside risk to the inflation outlook," Zheng said.

The consensus marks a sharp turnaround from mid-year, when economists were tipping at least one more rate hike in 2026 but most major banks still expected a hold.

What does the jobs data mean for borrowers?

The RBA has signalled it is prepared to tolerate a softer labour market.

As RBA governor Michele Bullock told a CEDA fireside chat this week: "I think that between 4.5 and 5 [unemployment rate] will probably take enough heat out of the labour market that'll ease pressure on inflation."

"Today's outcome is still toward the bottom end of that range," Zheng noted, adding that the RBA would likely still describe conditions as "a little tight" following next Tuesday’s rate announcement.

Clarke said the labour market is a lagging indicator and that there are signs the economy is slowing. "We judge that this easing will be needed to get inflation back to target amid higher-than-expected inflation and the continuing conflict in the Middle East," he said.

The pain is uneven across the country. in trend terms, Tasmania (5.2%) and Victoria (5.1%) recorded the highest unemployment rates. The ACT (4% ) and New South Wales (4.3%) recorded the lowest.

Lenders have already moved ahead of the decision. Fixed mortgage rates have climbed as banks brace, with ten lenders lifting 266 fixed rates by an average of 0.33% in a week. Canstar estimates each hike adds roughly $91 a month to repayments on a $600,000 loan.

The RBA decision is due at 2.30pm AEST on 29 September, a day before August inflation data is released.