They argue the economy is not only strong enough to weather rising rates – including the property market – but that failure to act leaves Australia vulnerable to both capital flight as borrowing costs are elevated elsewhere, and robs policymakers of "ammunition" for the next downturn.

Their views are at odds with most market forecasters, who don't expect the cash rate to be lifted above 1.5 per cent until this time next year, at the earliest.

In the meantime, the US Federal Reserve is continuing a regular schedule of rate hikes and the European Central Bank has flagged plans to wind-back its bond-buying program.

Despite market experts seemingly certain the central bank is firmly on hold, Reserve Bank governor Philip Lowe last week for the first time in more than two years ditched concerns that any strength in the Australian dollar would hurt the economy.

'The economy is quite robust at the moment, in terms of growth and employment ... [it] could handle gradual tightening without real risk,' according to Dr Carmichael. AAP

Major concerns

Dr Carmichael, who chaired the Australian Prudential Regulation Authority from its inception in 1998 until 2003, and now acts as chief executive officer of Promontory Australasia, concedes it's easy for critics to "sling shots from a distance" at the Reserve Bank, which he says has better access to information than most analysts.

"Having said that, on balance, I do come down to the position that we need to be moving sooner rather than later," he said.


His primary concern is that real short-term interest rates – or money market rates adjusted for inflation – are currently negative, with even long-term rates close to zero or only slightly positive.

"Zero or negative real rates drive poor investment decisions," the former regulator said.

'Zero or negative real rates drive poor investment decisions,' the former regulator says. Louie Douvis

"It does lead to resource misallocation – and in the past couple of years the most obvious manifestation was the use of cheap funding to invest in housing."

Another worry is that Australia has long been compelled to pay a "risk premium" to make up for a shortage of domestic savings, with Dr Carmichael noting the current gap between interest rates in Australia and other major economies has dwindled.

"We have historically paid a risk premium in the global economy, because we're a small economy that is both a capital importer and heavily dependent on natural resources – that premium can be tracked back through the decades.

"It's possible that it will go away, but I don't think so. It's still an underlying component."

'Rather than paying a premium to get funds from the US, we have a slight discount - that's true in real and nominal terms, which is very unusual historically.' Amr Nabil


'Unusual' position

He notes that in US dollar terms, Australia has already moved to a position of "implicit risk discount" – a reference to the yield on the benchmark US 10-year treasury rising above the Australian equivalent this year for the first time since 2000.

"Rather than paying a premium to get funds from the US, we have a slight discount – that's true in real and nominal terms, which is very unusual historically."

Given the lack of what he describes as a "sustainable" level of interest rates in Australia, Dr Carmichael says the next critical question is around the timing of hikes.

He lists two factors behind why this should happen sooner rather than later.

Jeffrey Carmichael, left, pictured with American business leader Eugene Ludwig, warns that the longer Australia waits to step in line behind other economies 'the more vulnerable we become'. Jim Rice

"The rest of the world is moving and the longer we wait to step in line behind them the more vulnerable we become to any swing in sentiment on the risk premium," he said.

'It could handle tightening'


He suggests concerns about the ability of households to weather higher rates are probably overdone.

"The economy is quite robust at the moment, in terms of growth and employment ... [it] could handle gradual tightening without real risk."

Dr Carmichael admits that the only real economy "cloud on the horizon" is the property market and household debt levels.

But he insists that's a risk which needs to be balanced against the possibility that ultra-easy monetary policy – in tandem with ongoing population growth and a lack of housing supply – could easily see the property market rebound.

"All of the academic research on bubbles says you've got to stop it as quick as you can. Do you exacerbate a crash that's already starting to happen?

"I don't think so. I don't think there's enough happening in the market for this to be a 30 per cent or 40 per cent correction; but I don't think it'd take much for it to turn up again."

'We seem to have the house in order'

Speaking from his office in Singapore, Dr Carmichael believes that hikes will also help restore Australia's most important policy settings to where they were prior to the financial crisis.


'If you don't shore-up during the good times, you're exposed in the bad times. And that's what happened in Europe': Dr Carmichael. Jasper Juinen

Households were heavily shielded from the global storm almost a decade ago when the Reserve Bank slashed the overnight cash rate from 7.25 per cent to 3 per cent in the space of just eight months in late 2008 and early 2009.

Today's 1.5 per cent cash rate means that kind of ammunition doesn't currently exist, he suggests.

"If you don't shore-up during the good times, you're exposed in the bad times. And that's what happened in Europe," Dr Carmichael said.

"We're coming off very solid growth; we seem to have the house in order – that's when we should get fiscal and monetary policy positions back in order."

Dr Carmichael said he would be "a lot more comfortable" if the cash rate was sitting around 3 or 3.5 per cent rather than where it is now, but acknowledges any changes must be gradual and well flagged by the central bank.

"If I thought we could get to there without crashing the asset markets I'd do it with one hit – but I know enough about monetary policy that you can't do it at once because it could cause a resounding crash."