Kiwibank is urging the Reserve Bank to "watch, wait, and weigh up" any action around rate hikes.
The Reserve Bank held the official cash rate (OCR) steady at 2.25% last week, with the decision to hold reflecting a balancing of the "potential benefits of responding pre-emptively to the risk of higher medium-term inflation against the cost of unnecessarily stifling the economic recovery".
It said the monetary policy committee was focused on ensuring inflation returned to the 2% target midpoint over the medium term, which requires core inflation and wage growth to remain contained and medium- and long-term inflation expectations to remain around 2%.
"If these conditions are not met, decisive and timely increases in the OCR would be required."
The war in the Middle East and the shutdown of the Strait of Hormuz have caused fuel prices to skyrocket, resulting in fears about inflation. There is concern that if prices rise, the Reserve Bank would have to hike rates to slow inflation.
Stats NZ was due to release its next inflation update on Tuesday next week. The Reserve Bank projected inflation of 3.0% in the March 2026 quarter and 4.2% in the June quarter. Its goal is to keep inflation between 1% and 3%.
Reserve Bank Governor Anna Breman said there was "so much uncertainty" around the outlook, especially after peace talks between the US and Iran fizzled out over the weekend.
ANZ said it expected the Reserve Bank to increase the OCR three times this year, to 3% from 2.25%.
Kiwibank has urged the central bank not to take any "knee-jerk reactions" around rate hikes until the Q2 and Q3 Consumer Price Index data points are available.
It said businesses and households were facing "heightened uncertainty" and were starting to bunker down. It said rising interest rates were "tone deaf" and "potentially reckless".
"Confidence has been hit, and so too have investment intentions and hiring.
"Both businesses and households are struggling with increased costs, not surging demand.
"The real threat that remains is the risk of a true knockout punch that would come from a domestic fuel shortage. And it is still a serious threat."
It said any increase in the cost of essentials would feed into short-term inflation, but higher costs would push demand down and put downward pressure on growth.
"We are likely to see a contraction in economic activity in the current quarter.
"And we won’t see this played out in the data for months to come. Q2 CPI isn’t out until July, after the RBNZ’s decision, and to know if inflation sticks around, we really need to see Q3 data at the very least."
In its debate, RBNZ's monetary policy committee weighed whether to act sooner, amid the competing risks of higher inflation and weaker growth.
Some members said an early rate response could keep inflation expectations in check, meaning less aggressive tightening later on. Others warned that increased rates could worsen an exponential slowdown, especially if the Middle East conflict ended soon.
Kiwibank said: "The RBNZ have been clear on one thing, which is that there won’t be any knee-jerk reactions from them. They don’t feel pressured to pick a move too early, and we agree."
It said the Reserve Bank's best course would be to "watch, wait, and weigh up the facts once they have the information in front of them".
"Households and businesses who’ve already seen their costs rise don’t need a rise in interest rates to dampen their demand – because this is not a demand story, this is not Covid.
"Raising interest rates risks a repeat of past mistakes, potentially inducing a recession. It could be reckless."
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