Mr Costello said there was concern that if interest rates lifted that would hurt highly leveraged households and noted voters were already "grouchy" about rising living costs outstripping anaemic wage growth. "Australian policymakers are saying: 'Oh we don't know if we can tighten things because people are under a lot of debt and the longer we leave it the more debt they'll be in so it will be even more hard'," he said. "But one day it has to happen. You have got to check out in relation to monetary policy. "The problem is now that we've borrowed so much how do you normalise? Because they're out there on the hook and it's going to be slow and it could be painful and the question is will it be a hard landing or a soft landing. But it's going to be a landing." That landing would come because when interest rates did rise it would have an impact on asset prices such as property.

"The question you've got to ask yourself is this: 'If money becomes more expensive, what is it going to do to asset prices?" he told the Urban Development Institute of Australia conference in Melbourne. "If money is more expensive, asset prices must fall. Not all prices in every situation but overall they must fall." Mr Costello also noted that interest rates were cut with the specific intention of lowering borrowing costs to encourage people to take on debt. "I get really amazed when I see all this hand-wringing of politicians saying 'oh we are terribly indebted, Australian households are terribly indebted,'" he said. "Of course they are because we made money so cheap, we made money so cheap because we wanted them to borrow, that was the whole idea.

"When a central bank reduces interest rates it's encouraging people to borrow. We wanted them to borrow ... so they could get the economy moving. We can't sit back at the end of it all and then say 'oh my goodness we made money cheap and they all borrowed, what a surprise'." His comments came as Treasurer Scott Morrison said on Tuesday he was confident Australia would not follow the lead of the US Federal Reserve, which is set to raise its key interest rate this week for the sixth time since 2015, any time soon. The US central bank committee meets for the next two days and is expected to increase the Fed funds rate by 0.25 per cent to 1.625 per cent after hiking it three times last year. That would be higher than the RBA's cash rate, presently at a record-low 1.5 per cent, something that hasn't occurred for almost 20 years. The US had a higher rate than Australia between mid-1999 and December 2000 following the Asian financial crisis.

[The banks'] reputation is worse than it's ever been Peter Costello Mr Morrison told Bloomberg on the sidelines of the G20 finance ministers meeting in Buenos Aires that what was happening in the US had been "well-forecast" and had already been factored in. "Australia's monetary settings have been far more stable in terms of what the outlook is," Mr Morrison said. "They've been that way now for some period of time and ... there's no real view that that's about to change any time soon." Meanwhile the minutes of the RBA's March rates meeting show the bank believes the effect of borrowers having to step up repayments when interest-free periods end "would be significant for some individual households".

"At the aggregate level, however, the likely increase in loan-related payments would amount to a small proportion of household disposable income and the effect on household consumption growth would be smaller still," the bank said. Royal commission caution Elsewhere, Mr Costello also warned that the Hayne royal commission into the financial services sector needed to be handled carefully. "We want to think very carefully about our financial institutions. There's a royal commission going on into the banks at the moment. It's finding banks were pushing out money probably more than they should've," he said. "Again that's what the government wanted them to do by the way. To push out money."

Mr Costello said Australia's banks had sailed through the financial crisis as probably the best performed financial sector in the world. "Ten years later they're on the nose. Their reputation is worse than it's ever been," he said. "Now I'm not excusing the banks. I think many of them made very serious consumer errors but the thing I always used to say when I was treasurer was this: 'I'll tell you what's worse than a very profitable bank, a loss-making bank. That is bad. That is a real problem.' "So in the midst of all of this we've got to figure out how we make sure our financial institutions are still strong and prudential and responsive and accountable. But we don't want to trade off prudential strength in our rightful desire to get better consumer treatment." with AAP