The unemployment rate jumped to 4.5 per cent and 18,600 jobs dropped out of the economy in April, the Australian Bureau of Statistics reported on Thursday.
Economists had expected the unemployment rate to hold at 4.3 per cent, with employment growth of 15,000 jobs in April.
The number of unemployed people rose by 33,000, the bureau's head of labour statistics Sean Crick said.
"Compared to what we usually see in April, more people remained unemployed this month," he said.
"Despite the fall in employment this month, hours worked rose by 15.8 million hours. This meant that hours worked per person rose by 0.9 per cent."
The Reserve Bank had forecast earlier in May the unemployment rate would average 4.2 per cent in the June quarter.
"This will provide some comfort to the Reserve Bank that demand in the economy is starting to soften," BDO chief economist Anders Magnusson said.
"While the drop in employment provides some comfort, an increase in hours worked suggests a nuanced story where the labour market is not cooling as quickly as the headline figures imply."
The participation rate fell 0.1 percentage points to 66.7 per cent.
The weak result was driven by a fall in female employment - the first since August 2025 - which was down 19,000 full-time roles and 13,000 part-time.
Employment Minister Amanda Rishworth said the figures showed some softening in the labour market against the backdrop of the conflict in the Middle East.
"The figures demonstrate the ongoing resilience of the Australian labour market, because despite the uptick in the unemployment rate, it remains low by historical standards," she said.
A softer labour market will help ease the Reserve Bank's concerns the economy is over capacity, adding to imported inflationary pressures resulting from the US-Israeli war with Iran.
Money markets had been pricing in about a 15 per cent chance of a hike at the next Reserve Bank meeting in June and were fully pricing in one rate rise by November.
Minutes from the central bank's meeting earlier in May, released on Tuesday, showed most board members still agreed fighting inflation was the priority, even though the risks to economic activity and employment were gathering.
Commonwealth Bank on Wednesday downgraded its economic growth forecast from 1.9 per cent to 1.6 per cent by the end of 2026 and upgraded its peak unemployment forecast from 4.4 per cent to 4.6 per cent.
"That leaves the RBA facing a difficult trade-off," CBA economists Belinda Allen, Ashwin Clarke and Harry Ottley said in a research note.
"Inflation was already running too hot and will go higher from here.Â
"At the same time, growth is likely to slow over coming months, which should bring demand more into line with supply and gradually reduce price pressures."
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