Jobless falls- rate rise still possible

An unexpected drop in the jobless rate to 4.2 per cent suggests that another interest rate rise cannot be ruled out just yet, economists say.

A surprisingly upbeat jobs report for June - which showed a nearly 30,000 jump in the number of people employed - coincided with an International Monetary Fund (IMF) report on Australia highlighting the risks to the inflation outlook.

Still, federal Treasurer Wayne Swan said the jobs data gave reason to be optimistic about Australia's economic prospects.

"Given the global credit crunch, given the global oil shock, these figures are very welcomed figures indeed," Mr Swan told reporters in Sydney.

"These figures today reflect that the Australian economy is continuing to grow."

The Australian Bureau of Statistics figures show the number of people employed jumped by a seasonally adjusted 29,800 in June, with full-time employment rising by 24,000.

The total employment outcome was three times economists' expectations and followed a revised 25,600 fall in May, the first drop in 19 months.

Economists had also expected the jobless rate to stay at 4.3 per cent for a third month.

At 4.2 per cent, the rate remains close to February's trough.

The February reading has now been revised to 3.9 per cent from 4.0 per cent, the lowest since the 2.7 per cent set in August 1974.

Commonwealth Bank of Australia senior economist Michael Workman said the jobs data indicated the current cycle of interest rate rises by the Reserve Bank of Australia (RBA) may have further to run.

"In the two previous tightening cycles the economy has slowed and the unemployment rate has moved higher. But that change has not begun yet," Mr Workman said.

He said the June quarter inflation readings on July 23 would be the next big hurdle for the interest rate outlook.

"We still see the risks skewed to an RBA rate rise in coming months," he said.

The IMF says inflation risks in Australia are "clearly on the upside" and the RBA should be quick to lift rates if economic growth does not slow as expected.

"In our view, the balance of risk to growth is tilted toward the upside, stemming from the recent jump in commodity prices, sizeable immigration flows, and the increase in state infrastructure spending," it said.

It said increases in energy prices and capacity constraints in the mining and housing sectors could push wage and price inflation higher than envisaged.

"The RBA should be prepared to tighten quickly if leading indicators suggest that domestic demand will not slow as expected or the outlook for inflation deteriorates," it said.

Annual inflation currently stands at 4.2 per cent, way above the RBA's two to three per cent target.

Consumers are yet to be convinced that the central bank has got inflation under control.

The Melbourne Institute's monthly indicator of consumer inflation expectations for July stayed at 5.9 per cent for a second month, the highest point since the survey began in June 1993.

Just 7.5 per cent of the survey's 1,200 respondents expected inflation to return to the RBA's two to three per cent target band, down from eight per cent in June.

This was the lowest proportion since June 2000, the month before the former Howard government's goods and services tax (GST) was introduced.