"If inflation does indeed return to 2.5 per cent, as the bank now expects, if growth does indeed return to 3 per cent 'within a few years', as the minutes of the June board meeting predict, if the world economy is indeed picking up, then a policy rate of 1.5 per cent is too low," Dr Edwards writes.

"It seems to me that something like eight quarter percentage point tightenings over 2018 and 2019 are distinctly possible, if the RBA's economic forecasts prove correct.

Upbeat script

"It's possible the tightening could start earlier, or if not the tightening itself, at least the signalling which should precede it. We may be seeing a little of that now."

Reserve Bank governor Philip Lowe has stuck to a resolutely upbeat script this year, shrugging off signs of a temporary slowdown in economic growth in early 2017, and ignoring calls from some commentators for additional rate cuts.

Speculation has been growing that as the world's biggest central banks begin to unwind their own unprecedented monetary policy stimulus since the global financial crisis, Australia will have scope to get back to normal.

Financial market betting implies a near-zero chance of another Reserve Bank rate cut this year, and there is now a 20 per cent chance of a hike by April next year.

In a clear warning to heavily-debt-loaded households, Dr Edwards said history shows that monetary policy tightening episodes are not "necessarily gentle or gradual".


Dr Edwards, who sat on the board between 2011 and 2016, noted that former governor Ian Macfarlane took the rate from 4.75 per cent in October 1999 to 6.25 per cent by August the following year.

Mr Macfarlane's successor, Glenn Stevens, took only two years to surge from 5.5 per cent in April 2006 to 7.25 per cent, and just over a year to go from 3 per cent in August 2009 to 4.75 per cent.

Household debt

"If this kind of trajectory is realised, the big thing markets and households will be discussing over the next two or three years is when the next rate rise will be announced, and when the sequence of tightenings will end.

"Now around 5.3 per cent, the standard variable rate on home mortgages will be around 7 per cent or a little more."

Prime Minister Malcolm Turnbull would "probably not be overjoyed" by a long Reserve Bank hiking cycle just as the Coalition prepares for the next election, he said.

However, he also cautioned that the increase in debt will "cause less distress than will be widely observed".

"Despite the big rise in household mortgage debt, for example, it is still the case today that the total of interest paid today on Australian household mortgages is very much less than it was six years ago, because while debt has increased a bit, interest rates on the total of outstanding debt have fallen a lot.

"As a share of household disposable income, housing interest payments are now 7 per cent compared to 9.5 per cent in 2011, or 11 per cent at the peak of the RBA tightening episode before the 2008 financial crisis.

"If the standard variable mortgage rate peaked out at around 7 per cent that would still be nearly one percentage point below the 2011 level, and two and half percentage points below the 2008 peak."