Labour Minister Michael Wood admits the latest official cash rate (OCR) hike will make life more difficult for some people.
Many households will be scrambling to find an extra few hundred dollars a week to pay the mortgage after the Reserve Bank (RBNZ) raised the OCR by 50 basis points to 5.25 percent on Wednesday.
The RBNZ said the inflationary pressures of the rebuild from Cyclone Gabrielle were to blame, while the National Party called the 11th straight hike a "kick in the guts".
However, Wood told AM New Zealand was prepared for what the increase might bring.
It comes as Kiwis grapple with ongoing inflation, which accelerated to 7.2 percent late last year. New Zealanders were warned by the RBNZ on Wednesday the inflationary impacts of the cyclone rebuild were "likely to be somewhat larger than assumed".
"The interest rate rises that are likely to flow from the Reserve Bank's decision obviously do make life a bit more difficult for people and can have an effect on the economy more broadly," Wood said.
"It has been forecast that we are likely to see an economic slowdown this year so it is possible that will occur in some places but we do start from a very, very strong position; we start with some of the lowest unemployment that we've had in our recent history, we start with the Government books in very good shape.
"That means we're in a good position [in] which we're able to support people as we do go through a challenging year.
"Things that we were able to introduce from April 1 like increases to superannuation, increases to Working For Families, continuing to the middle of the year to keep that half-price public transport and reductions to fuel excise duty."
Wood said the Government would continue focusing on supporting New Zealanders through the cost of living pressures.
But Paul Goldsmith, a senior National MP, said the Government wasn't doing enough.
"I think, the reality is, it's going to be very tough times for many New Zealand families and small businesses, in particular, who are struggling to get by," said Goldsmith, appearing on AM alongside Wood.
"The real issue is that we've got the RBNZ Governor with his foot on the brake trying to cool an economy but we've also got a Labour Government that's pumping the gas at the same time with a lot of extra spending, and poor quality spending," Goldsmith added.
Wood's comments about New Zealand being in a good starting position echoed those repeatedly made by Finance Minister Grant Robertson, who said in Parliament the country's debt levels were "among the lowest in the OECD and well below the Government's debt ceiling of 30 percent, ensuring that we are well positioned to handle the impacts of the likes of Cyclone Gabrielle and other future economic shocks".
"As the Prime Minister has indicated, we will continue to look for places to reprioritise and make savings and we have done a significant amount of that," Robertson said on Wednesday, under questioning from National Party Finance spokesperson Nicola Willis.
The RBNZ said Wednesday's 50 basis point OCR hike was because "demand continues to outpace supply and this continues to be reflected in persistently high domestic inflation".
