The unemployment rate has fallen to its lowest level in two years, putting upward pressure on wages and inflation.
According to data from the Australian Bureau of Statistics, the official unemployment rate dropped to 4.98 per cent in December 2010, suggesting the labour market is tight and likely to get tighter.
If this happens, interest rates will need to rise in order to combat the upside risk to inflation.
But despite the latest data, HSBC chief economist Paul Bloxham remains bullish that the Reserve Bank will keep rates on hold until at least Q2 2011.
“We are not reading much into the employment growth in December,” he said.
“We do expect further tightening of the labour market, putting upward pressure on inflation. But we continue to expect that the next increase in interest rates will be in Q2 2011.”