New Zealand seems likely to be one of the first developed countries to probe the path back to normal interest rates, with official rate increases starting next year.
BNZ senior economist Craig Ebert suspected it would be a bumpy ride but trying to avoid it might only make it a more painful exercise later.
Last week, Reserve Bank governor Graeme Wheeler issued a stern warning that mortgage rates could go to 7% or 8% next year if the recently introduced loan-to-value ratios (LVRs) did not reduce house prices and housing inflation.
Mr Ebert said, in theory, the New Zealand economy should be ready for the end of cheap money. Businesses and households had had many years to sort their balance sheets and cash flow.
The reality was it was only when the cheap money was withdrawn the true health of an economy and its financial system was revealed.
''The recent global convulsions over the potential for just a tiny tapering of the Federal Reserve's quantitative easing [QE] programme have been a reminder of this.
''This is not an argument for balking, more a warning about not letting the system become too dependent on overly cheap funding in the first place.''
From a New Zealand perspective, there was evidence of rebalancing in recent years. Private sector debt ratios had reduced, the household savings rate looked substantially recovered and the current account deficit had shrunk.
However, BNZ economists were not convinced the economy's rebalancing had been enough.
''Running what we'd call `normal' interest rates through everything doesn't leave us feeling supremely confident.
''But failing to do this only increases the chances of it being a much more painful exercise [further] down the track.''
In the past 18 months, household credit growth had rebounded to the point of pushing the debt ratios back up, Mr Ebert said.
The bounce-back had coincided with renewed house price inflation. On that basis, the Reserve Bank had every reason to point out the overvaluation of house prices. Mr Wheeler was correct to worry about the end-game.
While there were hopes the LVR restrictions would help bring house prices down, Mr Ebert was not sure. The more powerful, and permanent, correction mechanism might well come from normalised interest rates.
Returning interest rates to average would increase debt servicing costs, giving households a better sense of the relatively high debt loads they continued to carry. Debt servicing costs had dropped substantially but were not low by historical standards, even though interest rates were, he said.
Households were still predominantly loaded into either floating or very short-term mortgages.
As of August, 93% of mortgages with New Zealand-registered banks were for less than two years. About half were straight floating.
''This suggests a lot of pinch when OCR increases come into play - especially with longer-term mortgage rates already a good chunk higher than short-term ones, giving people nowhere to run,'' Mr Ebert said.
