BNZ head of research Stephen Toplis says New Zealand could see a recession at the end of 2022 or early 2023.
Wall street plunged into a bear market on Monday and today the US Federal reserve hiked interest rates 75 basis points.
It is the biggest rise in a generation and on the back of inflation cracking 8.5 percent - a forty year high.
Meanwhile in New Zealand, the tumultuous markets have seen thousands of dollars shaved off peoples KiwiSaver balances, in some cases literally overnight.
And now the New Zealand economy has shrunk - with GDP dropping 0.2 percent in the March quarter.
BNZ head of research Stephen Toplis told Checkpoint the GDP numbers show how the economy was beaten up by Omicron and the Covid-19 red traffic light settings.
"The June quarter will actually look a lot better, because we moved from red to orange and the economy opened up again. I think the real hurt is actually going to be this time next year," he said.
Toplis said the accumulation of pressures would show later.
"We're just starting to feel the impact of rising interest rates, but those interest rates are going to keep going up. And it's going to take a while for them to really flow right through the economy."
Toplis expects a recession in late 2022 or early 2023 when there are a couple of quarters of negative growth.
Although he hoped the recession would be short and shallow, Toplis warned the status of other global economies meant there was a danger it could be worse than anticipated.
"Most developed countries in the world are experiencing high inflation, rising interest rates and if everyone attacks it in the same way at the same time then that risks generating a much nastier world for us."
With the US, Canada, Australia and most of Europe trying to slow down their economies, Toplis said this poses a risk to New Zealand's economy which relies heavily on importing their products.
"The other thing is the higher interest rates go elsewhere, the more downward pressure it puts on the New Zealand Dollar which in turn creates inflation so the more upwards pressure it also puts on domestic interest rates."
Current inflation figures show the largest cost increases are coming through to the consumers in the price of petrol energy and food.
Toplis said these costs were "largely unavoidable" for many consumers.
Meanwhile the price of larger purchases, such as household commodities, were not increasing at the same magnitude as these everyday staple items.
Toplis said this was depressing the headline inflation rate, making the economic outlook appear better than it actually is.
"We all know that the prices of things we all need are rising very very aggressively and it just erodes your ability to spend."
He said inflation was expected to peak at seven percent but warned this would not be falling anytime soon.
"It will moderate slowly, I think about this time next year you're probably looking at a number between five and six percent and then the next year probably closer to the central bank's target range."
Toplis said inflation would undoubtedly fall but it was now up to the Reserve Bank to determine how much interest rates need to be increased to ensure this.
If inflation fell to zero, this would provide assurance that the cost of living was not increasing further, but consumers would still have to find the funds to make up for the seven percent shortfall in their budget, he said.
Some New Zealanders received a fright when checking their KiwiSaver balances this week, with tumultuous markets hitting some KiwiSaver funds hard.
Toplis said this was down to rising interest rates decreasing overall demand which in turn weakened companies' share prices due to a reduction in future profitability.
He said this scenario was most concerning for those people closest to retirement, while people with decades until retirement did not need to worry themselves.
