Economic and political commentator Bernard Hickey expects the official cash rate (OCR) to continue rising into early next year, but says the "signs are good from the rest of the world" that inflation will ease in time.
Rising cost pressures and inflation led to the Reserve Bank announcing the new OCR of 3.5% yesterday.
It's a rise of 50 basis points from the previous OCR of 3%, and the eighth consecutive time the Reserve Bank opted for a rates rise.
Hickey said yesterday's announcement wasn't a surprise, but "the little bomb they threw into the statement was that they thought about putting it up by a full three-quarters of a percent".
"Now that would've been more than the market expected and, just briefly, that pushed up our currency and interest rates a little bit, but remember we're still in a waiting game," he said. "We need to work out whether the rate hikes of the last year or so - which have been quite big and fast - are actually slowing our economy down."
He acknowledged that "they're certainly slowing down the housing market". Average asking prices across the country have been declining by $10,000 a month since January, the latest realestate.co.nz report stated.
"We're seeing people spend a little bit less, but it's not quite as slow as perhaps some people thought," Hickey said. "People are out there spending, they've got plenty of money in the bank accounts and also with unemployment so low, there's still plenty of money flowing around the economy.
"3.5% from basically nought in a year is quite some acceleration, but most people think that the Reserve Bank will go to 4% or maybe 4.25% early next year and then sit and wait and look around and see whether or not inflation's coming down.
"The signs are good from the rest of the world ... The inflationary winds are starting to settle in the rest of the world, it's just a matter of how quickly they come here."
Yesterday's other big economic announcement was the opening of the Government's books, with a lower-than-expected deficit of $9.7 billion.
"The deficit was much smaller than the Treasury was forecasting, about half the size," Hickey said. "Remember, when you have inflation that's quite high, that means the nominal size of the economy is growing quite fast and with your tax system, and when you don't reset your thresholds, you've got this thing called fiscal drag which is all these people going up to the next threshold and paying a higher rate.
"That's setting up a really interesting debate ... I call it a fiscal drag race to the election.
"Who is going to be able to give back the money and how are they going to do it?"
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