The sheer scale of Australia's household debt means lifting interest rates is going to be a far more sensitive operation than in previous times.

At present, just two economists think the Reserve Bank of Australia will hike rates this year as it frets about hefty mortgages and financial stability. Goldman Sachs and TD Securities both expect a single quarter-percentage-point increase in the fourth quarter, while traders are pricing in a 30 per cent chance of a December hike.



But consider a hypothetical scenario where the Federal Reserve turns aggressive in lifting rates, the Australian dollar tumbles, and the RBA seeks to tame a subsequent boost in inflation with monetary policy: too much household debt would pose a risk of the central bank crushing the economy with the hit from rate rises.

James McIntyre, head of economic research at Macquarie Bank, has run the ruler over previous tightening cycles in the mid 1990s and turn of the century, the first of which involved 11 quarter-point hikes.

He found that the subsequent surge in households' debt servicing ratio -- interest costs as a portion of disposable income -- would be achieved with less than a third of those hikes today, thanks to record high private debt levels.