Unemployment rises: Rate cut on the cards?

Will homeowners rejoice next month?

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Australia's unemployment rate has remained steady at 5.8% in December, despite the unemployed level rising by 8,000.

But the Australian Bureau of Statistics data saw the Australian dollar dive. 31,600 full-time jobs were lost, while the part-time employed increased by 9,000. The dollar fell to US88.18 cents earlier in the day – its lowest level since 2010 – according to the Australian Financial Review (AFR).

It seems currency traders have reduced expectations that the Reserve Bank will increase interest rates beyond its current levels of 2.5%.

Not that there was really much chance of that happening anyway.

If the RBA increased interest rates, it could see the Australian dollar rise – something the RBA doesn't want, and could stall a recovery in the non-mining sections of the economy – another problem the RBA doesn't need.

Australia's participation rate fell slightly to 64.6% of the population – it's lowest level since February 2005. Westpac economist Justin Smirk has told the AFR that if not for the fall in the participation rate, Australia's unemployment rate would have risen to 6.1%.

Next week's inflation data is not expected to fall outside the RBA's target range of between 2 to 3%, thanks to the Australian dollar falling from parity with the US dollar in May 2013.

Therefore, the most likely move by the RBA is for interest rates to be left on hold in February, and possibly for some time yet. But still, further weak economic data, and a high Australian dollar could see the Australian central bank forced to cut rates.

In fact, Westpac Banking Corporation's (ASX: WBC) Bill Evans is still predicting one more rate cut. But that could also place additional pressure on our big four banks, who may not want to cut mortgage rates further.

Ratings agency Fitch Ratings yesterday warned that a weakening economy and increased competition could create challenges for Australia's big four banks, including Westpac, ANZ Bank (ASX: ANZ), Commonwealth Bank (ASX: CBA), National Australia Bank (ASX: NAB).

Foolish takeaway

While it's seems likely that the RBA will leave rates on hold in February, nothing is yet set in stone.

Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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