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Diverging factors keep Australia's cash rate at record lows

By Swati Pandey

By Swati Pandey

SYDNEY (Reuters) - Australia's central bank is expected to keep interest rates at a record low 1.50 percent on Tuesday as it balances a "mixed" labor market and tepid inflation against soaring household debt.

The Reserve Bank of Australia (RBA) last cut official cash rates in August 2016 to head off the danger of deflation.

Data out last week showed inflation remained below the RBA's long-term target band of 2-3 percent for a sixth straight quarter in the April-June period.

One major reason for lukewarm consumer prices is subdued wage growth at 1.9 percent - the slowest pace on record and less than half the rate workers enjoyed a decade ago.

This has threatened consumer spending with ordinary Australians cutting back on shopping, particularly for discretionary items such as clothing and footwear.

Economists point to elevated levels of underemployment - which captures workers looking for more hours - as one of the key factors suppressing wages.

That is despite recent strength in the labor market. Full-time jobs made a remarkable comeback in June, gaining for a fourth month while the unemployment rate steadied at 5.6 percent.

Other indicators of the economy's health have also been generally positive, with a measure of business conditions jumping in the June quarter to its highest level since early 2008.

RBA governor Philip Lowe last week welcomed the recent pick-up in the labor market, adding the "broadly steady" unemployment rate had allowed it to remain patient on policy.

One big worry for the RBA though is a rapid increase in household debt amid soaring property prices.

The central bank fears that the trend of household debt outpacing income growth was eating into spending elsewhere in the economy.

Household debt is already at 190 percent of disposable income while property prices are climbing in the two key markets of Sydney and Melbourne at an annual pace of 12 percent and 13.7 percent respectively.

"Household debt is high and rising faster than the unusually slow growth in incomes," Lowe said in a speech last week.

"We are intent on delivering Australians an average rate of inflation over time of between 2 and 3 per cent. We are seeking to do this in a way that supports sustainable growth in the economy and that best serves the public interest."

(Reporting by Swati Pandey; Editing by Kim Coghill)