An expert has cast doubt on forecasts the official cash rate (OCR) is set to skyrocket, citing New Zealand's high levels of mortgage debt.
Unemployment unexpectedly fell to 4 percent in the June quarter, raising fears increased wage costs will drive inflation beyond the Reserve Bank's (RBNZ) target of 1-3 percent.
ASB on Wednesday said it now expects the RBNZ to lift the OCR three times before the end of the year, starting with a 25 basis point increase later this month, then again in October and November, bringing the OCR back to where it was before COVID-19 hit.
"As a consequence of the tight labour market, the rate of wage increases in the private sector has lifted sharply and by more than we expected," said senior economist Jane Turner.
Before Wednesday's figures were released, unemployment was widely tipped to fall just a fraction - from 4.7 to 4.5 percent.
Frances Sweetman of Milford Asset Management told The AM Show on Thursday the fall to 4 percent was "massive", the biggest quarterly drop in unemployment on record - and it's not over yet.
"You can see on some statistics that are printed on Jobseeker stats that has continued into July, so the labour market is incredibly tight. It's really hard to know what full employment is, but effectively, [we're there].
"All the messages that we're hearing from every business that we talk to is that they can't employ the people that they need. And wages are rising."
Raising interest rates cools the economy by making it more expensive to borrow, dampening investment. The record-low OCR over the past 18 months has driven skyrocketing property values, Sweetman calling it "the one thing that has the biggest impact on house prices".
She isn't convinced the RBNZ will go as hard on the OCR as ASB expects, citing two reasons. The first is the impact it will have on heavily indebted mortgage holders.
"We've got 50 percent more mortgage debt than we had six years ago. The economy is simply more sensitive to interest rate rises, but it's hard to know how much more sensitive."
First-home buyers will be hit hardest by rising interest rates, she says, even if they stem price inflation - because it will make it more difficult to service the debt, and they tend to borrow more than investors, starting with lower deposits.
"The second reason is that part of this inflation and this strong employment is what's termed as transitory - it's a temporary impact because of COVID. We've got the borders shut, we've gone out and spent a whole lot on goods and we've invested a whole heap in this low interest rate and post-lockdown environment.
"How does the RBNZ unpick when that's going to unravel and what that means on the economy is incredibly difficult."
Sweetman is picking two hikes, then a period of waiting while the RBNZ monitors the effects, before a potential third rise.
