People are being urged to prepare for a sustained economic slowdown, lasting until the end of next year at least.

ASB Bank's latest quarterly economic forecast said a collective desire to spend was running well ahead of what could effectively be supplied at a reasonable cost.

"Consumer spending volumes will shrink as households respond to increases in the cost of living and rising interest rates, although overall debt servicing costs are going to be manageable," it said.

However, some people would face huge increases in debt servicing charges, while savers would earn more, as the Reserve Bank's official cash rate (OCR) was forecast to rise to 5.5 percent by mid-2023.

The bank was also forecasting house prices to drop up to 25 percent from last year's peak, with prices expected to stabilise in 2024.

"Prepare now for a challenging 2023," ASB chief economist Nick Tuffley said, adding that the Reserve Bank's efforts to bring inflation down would take time.

"Inflation is proving stubbornly high, and we don't expect it will fall below the Reserve Bank's 3 percent target ceiling until mid-2025," Tuffley said.

Domestic wage growth was also putting pressure on businesses operating costs, which had the potential to accelerate through 2023.

"To curb this wage-price spiral, we expect the RBNZ to press on with increases to the Official Cash Rate, which we forecast to peak at 5.5 percent in mid-2023 and remain high for a year," Tuffley said.

Rates were expected to rise 75 basis points (bp) in February with a final 50bp move in April, taking the OCR to 5.5 percent, which was a cumulative 525bp increase since mid-2021.

"We don't expect the RBNZ to start reducing the OCR towards circa 3 percent neutral levels until the second half of 2024," he said, adding the New Zealand dollar was also expected to remain soft.

"NZ's large and growing current account deficit may also eventually weigh on the dollar."