The Bank said indicative mortgage payments for new buyers had risen to the highest rate since 2008, when over 60 per cent of a new buyer's median household disposable income was required to service a new 30-year mortgage.
The bank now sees that about 55 per cent of a new buyer's disposable income will be required to service a new mortgage on a median home.
Finance spokeswoman Nicola Willis said "rising interest rates will be difficult news for Kiwis already battling the cost-of-living crisis".
"This is the first time ever the Reserve Bank has increased the OCR by 50 basis points twice in a row, reflecting just how severe inflation has become," she said.
"A family with a $700,000 mortgage is on the hook for $14,000 more a year in interest than this time last year. If, as KiwiBank expect, mortgage interest rates rise to at least 6 per cent, a Kiwi family with a $700,000 mortgage will be paying at least $42,000 in interest a year – around $800 a week in interest alone," she said.
National and Labour have been battling for months over what's responsible for the level of inflation currently being experienced, which is currently 6.9 per cent, and not expected to fall to the Reserve Bank's target midpoint of 1-3 per cent until 2024, according to the Bank.
Labour has tended to blame supply chain factors and spiking energy costs from the war in Ukraine, while National has pointed the finger at the elevated level of Government spending.
The Reserve Bank's Monetary Policy Statement gave some vindication to National, while saying Labour's arguments were also correct.
"Government spending, as outlined in the 2022 Budget, is very high," the Bank said.
Government spending, as outlined in the 2022 Budget, is contributing to domestic demand.
The Bank updated its forecasts for the real level of government consumption from its February statement to reflect a higher level of spending.
The Bank did note that, with Covid spending winding up, government spending would decline in real terms.
Act leader David Seymour also laid the blame for Wednesday's hike at the foot of the Government.
"Adrian Orr told the Government he needed 'more targeted fiscal policy' to help fight inflation. Grant Robertson turned around and increased spending with a record $5.9 billion operating allowance. Adrian replied by putting up everyone's mortgage," Seymour said.
"The Government hasn't done its job, so now Adrian Orr is doing his. The problem is Adrian's way will hurt," he said.
The Green Party said the hike was further evidence an inquiry into the Covid-19 economic response was needed. Green MP Chlöe Swarbrick has been calling on the Finance and Expenditure Committee to open an inquiry since February, but she has been blocked by the committee's Labour majority.
Finance spokeswoman Julie Anne Genter said the bank was "stuck between a rock and a hard place now because of the action they took during the pandemic".
"The Government's reliance on the Reserve Bank's lowering of interest rates to boost demand in the economy has had the unwanted side-effect of pushing up house prices across the country. The combination of monetary and fiscal policy led to the biggest transfers of wealth to the richest New Zealanders, who still do not pay their fair share of tax," Genter said.
The party had previously called for more fiscal support - government spending - during the pandemic, targeted at the poor, to reduce the Government's reliance on the Reserve Bank to stimulate the economy by pumping up house prices with low interest rates.
