New Zealand facing higher inflation or unemployment rising as economist warns one 'needs to win'

An independent economist is warning the Reserve Bank faces a battle between "the lesser of two evils" - inflation and unemployment - with the official cash rate (OCR) now being forecast to rise higher than first thought.

ANZ last week changed its prediction for the OCR's peak. The bank had previously forecast the OCR would top 4 percent next year but it's now adjusted that peak forecast to 4.75 - a move which could spell more pain for Kiwi borrowers if mortgage rates follow.

Independent economist Cameron Bagrie said while headline inflation was on the decline, core inflation remained "sticky".

"It's that core, underlying inflation that we're seeing a lot more problems and if we've got a little bit more of what's called 'core, sticky' inflation - the Reserve Bank's going to have to go harder," Bagrie told AM on Tuesday. 

He said central banks around the world, including the US Federal Reserve, were also facing the same issues around "inflation stickiness".

"Inflation stickiness is enemy number one at the moment so you need to get out there and be a little bit more brutal, unfortunately, with the general economy to bring demand back in line with supply."

'Economy's hot to trot' 

Bagrie told AM fill-in-host Mike McRoberts New Zealand's economy is heading into a "big battleground".

The RBNZ is facing a fight between unemployment and inflation. New Zealand's consumer price index hit a 32-year high of 7.3 percent earlier this year and official unemployment was 3.3 percent.

"At the moment supply is constrained, we've got excess demand because the economy's still pretty hot to trot," Bagrie said.

"We're heading into a big battleground here where it's going to be a battle between inflation v the unemployment rate - pick your bigger evil but one of them needs to win."

The OCR was currently at 3 percent and largely expected to rise to 3.5 percent when the RBNZ meets early next month.

Bagrie said the impact of the OCR rising as high as 4.75 would depend on how long it stayed that elevated.

"The general consensus will be what goes up is going to come down on the other side. The real concern here is, what if we're going to go up and we're going to remain around 4.75 for a while?

"If we see a cash rate remain around 4.75 for a while, that's when you start to see those fixed rates are going to be a little bit more permanent with a 6-handle in front of them."