Australia's unemployment rate rose to 4.5% in July, a clear miss against forecasts for 4.4%, and its highest level since late 2021. The data is likely to reinforce expectations that the Reserve Bank of Australia has room to pause its tightening bias rather than move toward further rate increases in the near term, particularly as policymakers continue to watch whether weaker monthly readings are reflected in the broader trend.

At the same time, the labour market weakness was not broad-based. Full-time employment increased in July, and the monthly decline was driven entirely by part-time roles. The three-month average pace of employment growth remained relatively firm at 34,000, while the three-month average unemployment rate was unchanged at 4.4%. Taken together, the figures suggest the labour market is softening gradually rather than deteriorating sharply, giving the RBA time to assess the cumulative effect of its policy settings without facing pressure for an immediate shift in stance.

The Australian dollar is likely to face some pressure after the headline disappointment, although the sharp upward revision to June's figures should help limit the reaction somewhat.

Australian employment unexpectedly fell in July after a strong gain in June, while the unemployment rate climbed to its highest level since late 2021, indicating that more slack may be building in the labour market than previously thought, according to data released Thursday.

Employment fell by 15,800 in July, compared with expectations for a modest increase. June's employment gain was revised higher to 80,200 from an initial estimate of 76,300, alongside a stronger full-time component.

The unemployment rate increased to 4.5% from 4.4%, the participation rate eased to 66.9% from 67.0%, and the employment-to-population ratio declined 0.2% to 63.9%. Because the fall in participation partly offset the decline in employment, the unemployment rate only moved higher at the second decimal place, which somewhat tempers the headline result.

The composition of the decline stood out. The entire drop in employment came from part-time roles, which fell by 32,100, while full-time employment rose by 16,300 over the month. Hours worked declined 0.6% month on month, adding to signs of a softer labour market even as the underlying full-time trend remained resilient.

The employment-to-population ratio and monthly swings in the labour force data are known to be volatile. Combined with the sizeable upward revision to June, the report points to a labour market that is easing gradually rather than one that has turned sharply weaker.

That view is supported by the three-month trend. Average employment growth over the period remained at 34,200, while the three-month average unemployment rate was unchanged at 4.4%, both noticeably steadier than the single-month figures suggest. So far this year, employment has increased by 145,800, up from 104,900 over the same period last year.

The latest figures give the Reserve Bank of Australia more time to assess how its policy settings are flowing through the economy. With the bank next meeting at the end of September, the report adds to a run of data that will help shape its assessment of labour-market slack and the pace at which domestic conditions are cooling.

The bank next meets at the end of September.