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Australia holds key rate as sliding currency stimulates growth

Sydney

AUSTRALIA kept interest rates at a record low on Tuesday, as it has for the past two years, while a currency sliding towards 70 US cents offers the prospect of additional stimulus for the economy.

As expected, Reserve Bank of Australia (RBA) governor Philip Lowe left the cash rate at 1.5 per cent, a stance that he expects will eventually tighten the labour market and spur enough wage growth to speed up inflation. While the Aussie dollar's more than 10 per cent drop since February may help quicken that process, there is a risk that rising mortgage rates and falling property prices could encourage households to put away their wallets.

"One continuing source of uncertainty is the outlook for household consumption," Mr Lowe said in a statement after the decision. "Household income has been growing slowly and debt levels are high." On the exchange rate, the governor noted that "it has depreciated against the US dollar along with most other currencies."

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The RBA has said that its next rate move is more likely to be up than down; the governor, since taking the helm in September 2016, has been reluctant to cut further given the diminishing returns from easier policy.

Yet the RBA's stimulus was eroded somewhat when Westpac Banking Corp last week said that it was hiking its key mortgage rate by 14 basis points, more than half a typical RBA increase, to compensate for higher offshore funding costs.

That prompted traders to push out their bets for the central bank's first rate hike since 2010 and drive down the currency. Many analysts now see the Aussie dropping into the 60s, potentially boosting the competitiveness of exporters and import-competing industries and allowing them to take on more staff.

The Aussie dollar would probably need to fall into the 60s for a sustained period - potentially almost a year - to change the RBA's calculations. The central bank currently does not see unemployment falling to the 5 per cent level generally associated with faster wage growth until December 2020. The jobless rate is currently 5.3 per cent.

Australia is also on track for a change in government in the first half of next year to a less business-friendly administration. The Labor party may dilute the current government's income tax reductions that - in an environment of stagnant wages - are one of the few options available to boost household incomes. BLOOMBERG