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Australia holds key interest rate as housing downturn threatens consumers

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Australia kept interest rates at a record low Tuesday as it gauges the impact of falling property prices on an economy that's otherwise showing strong growth and hiring.

[SYDNEY] Australia kept interest rates at a record low Tuesday as it gauges the impact of falling property prices on an economy that's otherwise showing strong growth and hiring.

Reserve Bank Governor Philip Lowe left the cash rate at 1.5 per cent -- as expected, and as he has since taking the helm in September 2016. House prices are down an annual 6.1 pe rcent in Sydney, the epicenter of the market, and have fallen nationally for the past 12 months. At stake is consumption: whether the decline in relative wealth prompts households to rein in spending.

Policy makers maintain a property cooling is necessary to safeguard financial stability, and the current timing is fortuitous given the economy is growing at more than 3 per cent and unemployment is at 5.3 per cent. RBA typically tends to avoid raising rates when Sydney prices are falling, which along with weak wage growth and subdued inflation explains why traders are pricing in little chance of a tightening before 2020.

"The low level of interest rates is continuing to support the Australian economy," Lowe said in his statement. "Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual."

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The Australian dollar was little changed after the decision, buying 72.28 US cents at 2:33 p.m. in Sydney.

Lowe is concerned about household debt Down Under, which stands at a record 190.5 per cent of income and was spurred most recently by a five-year housing boom as borrowers chased prices ever higher. Potentially further weighing on households is an out-of-cycle mortgage-rate hike by three of the nation's big-four banks. Consumption accounts for almost 60 per cent of Australia's gross domestic product so any risk to its outlook is significant.

"Conditions in the Sydney and Melbourne housing markets have continued to ease," Lowe said. "Credit conditions are tighter than they have been for some time, although mortgage rates remain low and there is strong competition for borrowers of high credit quality."

More positively, the Australian dollar has declined almost 11 per cent from its January peak, boosting the competitiveness of exports and strengthening import-competing industries. The RBA has stood pat as the Federal Reserve tightened policy; it's expected to keep doing so, widening the rate differential between the U.S. and Australia and maintaining pressure on the currency.

The Aussie could come under further fire as the trade war between the world's largest economies intensifies. Australia is the most China-dependent developed economy and would be hit hard by a sharp slowdown in that nation.

Still, the Australian economy's flexibility in the face of global upheaval shouldn't be underrated: it has managed to avoid recession since George H W Bush was president.

BLOOMBERG