Westpac's latest economic overview continues to paint a grim picture of New Zealand's financial state.
The report released on Thursday warned growth is slowing and the economy's still running above its sustainable capacity - with inflation remaining very high.
Westpac highlighted a drop in demand from key trading partners like China and the need for wage growth to slow to spark a further drop in inflation.
"We expect that inflation will remain elevated over the coming year, meaning ongoing pressure on households' budgets," the report said.
"The impact of higher consumer prices is being felt by every family across the nation and it's been especially tough for those families on lower incomes."
Westpac chief economist Kelly Eckhold said it's likely New Zealand's current account deficit would remain elevated in the coming years.
"Much will depend on the extent to which slowing growth is reflected in a loosening of the labour market. Forward indicators suggest that employment growth will slow but there is uncertainty about how quickly this will translate to slower growth in wages."
Official cash rate hikes 'delayed, not cancelled'
The report said while monetary policy tightening had paused and the Reserve Bank (RBNZ) believed the official cash rate had peaked, Westpac expected a final 25 basis point rise later this year.
Domestic inflation pressure had persisted for longer than the central bank anticipated, the report said, adding "a period of below trend growth is needed to bring inflation back to target".
"The last few months have revealed that, in common with other advanced economies, inflation pressures remain hot. The fall in inflation in the June quarter from 6.7 percent to 6 percent was encouraging in the sense that it was in line with expectations.
"However, the underlying picture was more concerning as the decline owed largely to weaker tradable good prices. By contrast, inflation in the domestically influenced non-tradable components fell only slightly from 6.8 percent to 6.6 percent.
"In our central scenario, the case for some further tightening by the RBNZ remains strong. This is despite the weaker March 2023 GDP outcome which took the economy from an overheated to [a] less overheated starting position and gives us greater confidence that the cyclical downturn is upon us."
Going forward, Westpac expected quarterly economic growth to slow to 0.1 percent in September and remain flat for the two subsequent quarters.
"The slowdown in economic growth is mainly due to the continued tightening in domestic financial conditions," the report said.
"Over the past year, large numbers of borrowers have rolled off the very low fixed mortgage rates that were on offer in the early stages of the pandemic and on to much higher interest rates. That's seen debt servicing costs climbing rapidly.
"In fact, according to the RBNZ's May Financial Stability Report, households with mortgages have already seen interest costs rising to around 15 percent of their disposable incomes and it's set to rise to over 20 percent by the end of this year.
"With GDP growth to remain sluggish for some time, unemployment is set to rise from its current low level of 3.6 percent to 5.2 percent by the end of next year."
Westpac predicted annual inflation would fall to 5.9 percent in September and 4.9 percent in December.
