The country's biggest bank is forecasting the Official Cash Rate to be lifted to 3 percent by April next year - the highest since 2015.
ANZ previously forecast the OCR to peak at 2 percent in August this year. Photo: RNZ / Dom Thomas
The ANZ Bank said it had changed its outlook because of strong inflationary pressures and in particular the tight supply of labour.
Inflation hit its highest level in a decade in the September quarter, as consumer prices rose 2.2 percent, taking the annual rate to 4.9 percent.
The Reserve Bank (RBNZ) began lifting the OCR in October last year to counter inflation pressures, with two consecutive 25 basis point (a quarter of a percentage point) increases to 0.75 percent in November.
ANZ previously forecast the OCR to peak at 2 percent in August this year.
But that has now changed, with the labour shortages unlikely to be resolved any time soon, its chief economist, Sharon Zollner, said.
"The unemployment rate could even start with a two within the next six months so that suggests quite a lot of wage pressure."
Zollner said households would also be wanting higher wages to compensate for the increasing cost of living.
"We think the Reserve Bank is going to have to push on through and raise the OCR considerably higher than anyone was thinking six months ago or a year ago."
However, she cautioned that there was extreme uncertainty about the present economic outlook.
"While we see the balance of risks as skewed to the downside, they are not one sided.
"If for example key global central banks start to lose inflation targeting credibility, Covid related supply-side disruptions worsen in China and fail to improve elsewhere, or climate change policy and/or impacts kick in meaningfully, inflation could prove even harder to rein in."
ANZ said given the current level of house prices and household debt, an OCR of 3 percent could be seen as having too high a growth cost to contemplate, but the reality was different.
"The fact is however, that globally, prolonged strong monetary and fiscal stimulus in response to what turned out to be a net negative supply shock has unleashed the inflation dragon.
"Central banks now have to do what's needed to bring inflation down, painful as that may be."
ANZ says given the current level of house prices and household debt, an OCR of 3 percent could be seen as having too high a growth cost to contemplate, but the reality is different. Photo: RNZ / Nate McKinnon
Inflation could hit 6 percent or more
ANZ said it was yet to finalise inflation numbers for the December quarter, but believed it would be closer to 6 percent or higher than the 5.5 percent it previously forecast.
Inflation would probably rise further in the coming quarters, with its drivers taking longer to bring under control than previous forecasts, it said.
"And that's not even accounting for the imminent arrival of Omicron in New Zealand. The international experience shows that when it does land on our shores, Omicron will cause an intense, albeit short, period of chaos, disruption and yet more price pressures," Zollner said.
She said in the 10 years before Covid-19, inflation was "problematically low".
"In that environment central banks were able to backstop growth, backstop equity markets even with the perception that they had your back.
"However, when inflation becomes problematically high, then they can't do that. They have to focus on getting inflation down even if it's painful."
It would be a different environment for asset prices and risk takings, and right now, it was hard to see what could turn the course of rising inflation, she said.
"Yes, our plan is to open up our border fairly soon but every country is experiencing labour shortages at the moment and there will be a queue of people waiting to get out as well as a queue of people waiting to come in."