Financial experts are expecting record-breaking interest rate increases ahead of the Reserve Bank's (RBNZ) official cash rate announcement later on Wednesday.
With inflation still high and the labour market staying tight, the RBNZ may need to further increase the official cash rate to get consumer prices back in check - with many tipping an unprecedented 75 basis point increase.
Some major banks, however, believed the RBNZ risked overcooking its response if it continued down the hiking path.
"In our opinion, if the cash rate was to peak at 5 percent, substantially higher mortgage rates would almost be a certainty, especially given banks funding costs will also be pushed higher by increasing competition for term deposits due largely to the end to the Funding for Lending Programme," BNZ said in its official cash rate preview.
"So the long and short of it is that a 75-point increase would result in a messaging headache for the Reserve Bank. This is a very good reason to avoid making such a move if at all possible."
Despite this, Infometrics principal economist Brad Olsen said Wednesday's numbers might be the highest ever.
"I think we should be worried but that is also because inflation remains so high and, despite all of the work that the Reserve Bank has done so far to try and get inflation under control… we're still not seeing any real effect coming through to the economy," he told AM Early.
"There's quite a difficult decision they've got to make today."
New Zealand's annual inflation accelerated to 7.2 percent in October, driven by gains in construction and transport.
As a result, Olsen said the RBNZ's realistic options on Wednesday were either a 50 or 75-basis point hike.
"Now, 50 is what they have been doing previously but… you've got to think that they'll opt for that larger 75 basis point increase - that would be the largest increase to the official cash rate on record.
"Who it's going affect the most are those that are borrowing… and I think you'll see a lot of people over summer be thinking very carefully about how much their mortgage repayments are and how they are going to afford the increases that have come into the new year."
Lack of planning behind inflation spiral - Luxon
The Government had made moves to ease the cost of living pressures on New Zealanders - including extending cuts to fuel excise duty, road user charges and public transport - but National Party leader Christopher Luxon told AM inflation was skyrocketing due to a lack of economic planning.
"The news today is going to be incredibly alarming and cause a lot of sleepless nights," he said of the official cash rate (OCR) announcement.
But Labour has consistently said inflation was being influenced by global factors, including the Russia-Ukraine war and COVID-related supply constraints.
"The Government will continue to carefully target spending in these highly uncertain times," Finance Minister Grant Robertson said last month.
Looking ahead, BNZ was forecasting the OCR to peak at 4.5 percent next year.
"There is upside risk to that," the bank said of its forecast. "We do expect inflation to start waning next year - implying the RBNZ is near to getting on top of its OCR cycle. However, our forecasts of what the bank will likely do with its cash rate ahead will also need to take account of what Wednesday's MPS (monetary policy statement) has to say for itself."
Olsen said a 100 basis point hike on Wednesday also couldn't be ruled out.
"Let's be fair, given that most forecasters are saying, 'There need to be further increases next year', I don't think you can rule out a possible 100 basis-point increase… if the Reserve Bank thinks it needs to get to somewhere, the faster it gets there [is] perhaps the better."
