Mounting inflationary pressure has financial markets already pricing in rises later this year, though the Reserve Bank had earlier indicated the interest-driving official cash rate (OCR) could have been held around the present level of 2.5% until early-2012.
The Reserve Bank, which has an inflation target range of 1%-3%, will next week review the OCR.
Inflation figures released this week were up 1%, above 0.8% expectations, hitting a 21-year high of 5.3% for the year to June.
BNZ economist Stephen Toplis said the financial markets had already priced in a 30% chance of a OCR rate hike in September.
"There's a 70% chance priced in of that hike having happened by October, and almost 50 basis points of hikes are priced by January," he said.
The 1% gain to inflation was not only above market expectations of 0.8%, but clearly above the Reserve Bank's earlier 0.7% pick, he said.
"It's inflation forecasts that should dominate the Reserve Bank's thinking, not ancient history," he said.
Federated Farmers is concerned the highest inflation levels for 21 years will put pressure on the New Zealand dollar, which last week briefly hit a record US85c.
Inflation was a major business concern because it affected the confidence to invest, the organisation's national president and economics and commerce spokesman, Bruce Wills, said.
While the Real Estate Institute of New Zealand's latest farm sales data showed the number of farms sold had increased, the median price per hectare had slipped to its most affordable level since July 2004.
The Reserve Bank has looked through past increases due to policy changes like GST, ACC and the emissions trading scheme, but there was a "worrying persistence" with inflation, Mr Wills said.
Despite the "tentative green shoots of recovery" seen in gross domestic product, the consumers price index heightened speculation the Reserve Bank might revisit the Official Cash Rate.
The challenge was to reduce inflation without causing another recession. To do that, wider government policy needed to "mesh" with the Reserve Bank attempting to make the economy more productive and competitive, he said.
ASB economist Jane Turner said while the bank had brought forward its rate hike predictions from early 2012 to December on the back of recent positive gross domestic product (GDP) figures, she maintained a December hike was more likely than earlier in the year.
"The Reserve Bank will be looking at the positive recovery [GDP] and keeping an eye on inflation, but it has the high foreign exchange rate and fragility in the housing sector to consider," she said.
Mr Toplis said for the 12 months to June inflation rate of 5.3%, food prices were up 7%, energy costs 7.5% and petrol 20.1%. During the previous quarter, those three items accounted for 50% of the total increase in inflation.
"Not only is the annual headline rate above 5% this quarter, but we also expect that it will stay that way through September, our expectation being that prices will increase a further 0.8% in that quarter," Mr Toplis said.
Westpac chief economist Dominick Stephens said underlying inflation was clearly warming, with construction costs rising 0.9%.
"That could be the thin end of the wedge as far as quake-related construction price hikes go. And rents rose 0.5%, on top of 0.6% in the March quarter. We think there is a lot further to go in that dynamic," Mr Stephens told the New Zealand Herald.
The case for higher interest rates was clear, Mr Stephens said, with growth and inflation both running stronger than expected and inflation expectations around 3% in the Reserve Bank's own survey.
"As for when they choose to start, what might give them pause for thought is the higher exchange rate and gathering clouds around sovereign debt issue in both Europe and the United States."
ANZ chief economist Cameron Bagrie said the OCR at 2.5% was simply inconsistent with the outlook for inflation.
"There is not much room for the bank to absorb any more upside surprises for inflation.
With inflation expectations already at elevated levels and recent evidence pointing to less spare capacity, we struggle to see how the Reserve Bank's projections of inflation heading towards 2% by early next year can be achieved," he said.
