The rapid 250 basis point rise in domestic interest rates that would leave Australian households facing a mammoth debt servicing burden is unlikely to occur, local economists said.

The Bank for International Settlements warned overnight that Australian households were some of the most vulnerable to rising interest rates.

At 189 per cent of household income, household debt levels are at a record high, but debt servicing remains manageable because interest rates are at record lows.

But were this to change, households could very rapidly find themselves facing a debt servicing burden far beyond historic norms.

According to the BIS' statisticians, a 250 basis point rise in interest rates would take the debt burden to six standard deviations above the long-term average.

In most circumstances, 96 per cent of events occur within two standard deviations of the average - an occurrence six standard deviations from the mean indicates an event that occurs far less than 1 per cent of the time.

The statistics indicate the extent to which debt levels are outside recent history. And how this debt burden has made the high interest rates of the past impossible for the Reserve Bank to realistically implement.

During the global financial crisis, the RBA rapidly cut interest rates to 3 per cent - a level seen at the time as highly expansionary. But the neutral interest rate - which would neither inflate nor depress the economy - has since shifted markedly lower.

For a long time, this neutral rate has been around 5.5 per cent, said Commonwealth Bank chief economist Michael Blythe. "We now tell people 3 per cent is our best guess for the neutral rate," he said.

UBS' chief Australasian economist Scott Haslem said when the rate was 5.5 per cent, the RBA used to control inflation through moving the cash rate 75 basis points either side of that. He expects its range is similar now, only off a far lower base.

"We think 1.5 per cent - where we are now - is the bottom of the cycle," he said. "Something like 2.75 per cent is the new neutral, whereas 4.0 per cent would be the top of the cycle.

A 4 per cent interest rate is 250 basis points above today's level, which is the same as in the BIS scenario under which the debt burden would balloon.

Mr Haslem noted it may take less than that to achieve the BIS scenario if private banks choose to raise interest rates regardless of the RBA staying on hold - as they have been doing in recent months.

"But to get near that stylised scenario, you'd need to transition from where the cash rate is today - very accommodative - to the top of the cycle," he said.

Economic factors, including the RBA's own forecasts, mean this is unlikely to happen any time soon.

"That's a reflection of slower domestic growth," said Mr Haslem.

"Consumers have less free cash flow, so that's flowing through. There's structurally lower wages - so inflation is lower. And then there's the demise of corporate oligopolies in Australia. There used to be many sectors here with oligopoly formations and good pricing power. But they're being disrupted, through international competition.

Mr Blythe said the Australian economy was in for "a long period of not much happening with cash rates".

"As long as the housing markets remains as heated it is, the Reserve Bank is unlikely to be cutting. Equally when RBA is forecasting below-2% inflation all the way to 2019. It's hard to justify a rate rise against that.

"Our view is the next move in rates will be up, but we don't expect to see that till the end of 2018. And when we finally get to that point, it'll be a slow, cautious, drawn-out approach, largely because of the debt issues that BIS have talked about. Debt levels are much higher than the last time we had a proper rate rise cycle – so every rate increase should bite a bit hard than it did back then."

Australia's debt servicing ratio last peaked in 2008, at 11.2 per cent of disposable income, when interest rates were 7.25 per cent.

"If you do the rough calculations today, we'd need a cash rate of just 4 per cent to get back to that debt servicing ratio," said Mr Blythe. "That reflects the expansion of household debt that's gone on."

Earlier this year, Macquarie's Jamie McIntyre said it would take only three rate hikes to bring Australia's debt servicing burden above 10 per cent.

"Given households' higher levels of debt, we estimate that a 1 [percentage point] increase in the RBA cash rate would – in the absence of further increases in bank borrowing rates – push the household debt servicing ratio beyond 10 per cent," he wrote to clients.

"The lift in the debt servicing ratio the RBA achieved with [a] 275 basis points tightening cycle through the mid and late 1990s could now be achieved with just over 3 rate hikes."

Mr McIntyre also did not expect the RBA to raise rate until 2019.