Sir John Key unveils his predictions for the economy in 2023

Sir John Key predicts mortgage rates will "have a 7 in front of them" into 2023.

His comments come amid a spike in mortgage rates in recent weeks, as the Reserve Bank (RBNZ) continues to increase the official cash rate in a bid to curb inflation.

New Zealand's annual inflation was 7.2 percent in October, a near three-decade high. 

As a result, the RBNZ has been going hard on tactics to cut New Zealand's spending in an effort to curb inflation. The central bank, after late last month raising the official cash rate by 75 basis points - the most significant jump on record - said the economy was set to shrink next year

Annual inflation was forecast to average 7.5 percent for the rest of 2022 before declining in 2023.

In an interview with AM on Tuesday, Sir John said it could be about to get a whole lot harder for buyers to get approved for home loan applications.

The former Prime Minister, now the chairman of ANZ New Zealand, said the RBNZ had a tough job to "slay the inflationary dragon" and interest rates would rise further, as a result.

"Our economists think base rates - the official cash rate - [goes to] 5.75 percent," he said.

"I think we're going to have floating rates [stress-tested at] very close to 10 percent - I think people will be writing mortgages [at]… you've got to believe they're going to have a 7 in front of them."

Sir John Key.
Sir John Key. Photo credit: Newshub.

Asked what that could mean for the housing market, Sir John said that would depend on how severe next year's predicted recession.

"My own personal view on housing is it doesn't really go through the floor," he told AM host Ryan Bridge.

"Eventually, builders are just going to say… 'OK, I can produce this house for X, I can't sell it for Y, therefore I just won't build it.' I think what you'll see over the next 12 months is the freeze frame in terms of building and new supply coming on the market.

"Then, what you know is… twelve months or 18 months on people start to buy."

Ultimately, though, Sir John said next year was set to be a tough year for the economy.

"It's going to get worse," he said. "Interest rates have risen a lot this year and they're going to go up more next year.

"At ANZ, half of all of our mortgage holders have a mortgage that either has a 2 or a 3 in front of it - and it rolls off over the next wee while. So you not only have the people coming in trying to buy a house, you have everybody that's existing and then that feeds into rents and everything else."

Sir John's comments come amid increasing concern about rising interest rates. Late last month, ANZ raised its floating home loan to 7.99 percent. 

Economist Cameron Bagrie told AM on Tuesday "a couple of hundred" basis points of interest rate tightening were still on the way next year.