"The very strong inflation pulse has taken away the luxury of time and caution, as the OCR has more work to do," ANZ economists said.
"We feel pretty confident in saying that we probably haven't seen the worst of inflation yet ... not only have we seen oil prices spike on concerns about a global energy shortage; it's also become clear that supply chain pressures are going to get worse in the near term."
ANZ now expected annual inflation to reach 5.8 per cent by March next year before gradually easing back to 2 per cent by mid-2023.
ANZ economists accepted there was much uncertainty such as global supply chain disruptions and oil prices, but noted that even stripping out some of the volatile items, core inflation was still sitting above the Reserve Bank's target of 2 per cent and set to go higher.
Supply chain problems were not able to be fixed by raising interest rates, but ANZ noted higher rates would cool local demand.
"Interest rate hikes out to August 2022 should be very effective at dampening the domestic inflation impulse. Many households are highly indebted after taking on massive mortgages during a year where house prices rose over 30 per cent, so even a small increase in interest rates will have a significant impact for those households.
"By reducing appetite to borrow and making indebted households more price-sensitive, rate rises still throw sand into the gears of the inflation process by impeding the pass-through of costs.
"Lower demand means less inflation pressure than otherwise, regardless of the mix of demand and supply developments that kicked it off."
The economists said rising interest rates had already started to tighten policy, but RBNZ rate rises would also increase the chances the housing market could turn sharply, with flow-on effects for spending and construction, and businesses could stop investing and hiring.
"All up, it is far from a given that the wheels will stay on the bus while the RBNZ steadily increases the OCR for the best part of a year."
- RNZ
