A little over three hours' flying time from Australia's east coast could lie a window into our future.

From Auckland, at the top of New Zealand's North Island, to icy Invercargill in the south, property prices are on the slide.

They've fallen every month this year and now sit almost 6 per cent below their November peak following a series of punishing interest rate hikes that began last October and have pushed the official cash rate to 2 per cent.

In some regions, house prices are down more than 9 per cent, after surging almost 50 per cent during the pandemic.

One of the first central banks in the world to lift rates off the floor, the New Zealand Reserve Bank last year became alarmed by a sudden surge in inflation and moved swiftly to reign it in.

So far, according to ANZ chief economist Sharon Zollner, the property retreat has been orderly. But with a further series of steep hikes pencilled in for the remainder of the year, she is mindful that things could turn ugly for Kiwi households.

"We're just concerned about that freak-out factor," she told 7.30. "Will they have a little bit of a panic because [their house] is worth less than it was six months ago?

"I guess, on balance, we're thinking that freak-out factor might be slightly larger than the Reserve Bank's assuming."

So far the rate hikes have yet to dent inflation. In fact, it jumped to 6.9 per cent in the March quarter with every indication it could go even higher.

And while shortages of everything from food to fuel are driving prices higher, the most worrying shortage is a fickle but hugely important intangible: confidence. Business confidence is the weakest since the pandemic hit, while Kiwi consumer confidence is dire.

It's been clobbered by the rapid round of rate hikes. And the concern is that the rate hikes may not even directly attack the problem. Most of the cost of living pressures are the result of supply problems whereas rate hikes are designed to curb demand. 

It is a worry starting to ricochet around the world. In their enthusiasm to stamp out inflation, could central banks snuff out growth and tip the global economy into recession?

First home buyers hung out to dry

Cassie Watt was as proud as punch. 

Back in March, the then 24-year-old, having saved $100,000, mustered all her finances and, along with a $385,000 bank loan, bought her first property in Sydney's west.

"It's always been the goal," she says. "It's a great achievement, especially given how hard it is to buy property currently."

Ms Watt had $6,000 left in her bank account as a savings buffer when she opted for a variable rate loan. Within weeks of moving in, she received the letter most home owners dread but haven't seen for more than a decade. Her repayments would be increasing. And, she realises, it's likely to be the first of many.

"It's a little bit scary because you think, OK, this is a little bit now but is a little more going to come further down the track? And how much is that repayment going to increase?"

Ms Watt, along with millions of Australians paying off their house, are likely to find out on Tuesday when the RBA meets. There is every chance we will be hit with a double whammy — a half-a-percentage-point hike.

While declining Sydney and Melbourne house prices no doubt will weigh on those sitting around the RBA board table, it is grappling with two much bigger issues: how to tame inflation and how to regain credibility after last year urging around 165,000 first home buyers just like Ms Watt into the market with assurances that interest rates would remain on hold for three years.

"I think they have to increase rates," says former Treasury secretary Ken Henry. "They want to be in a position such that when there's another shock, they are going to adjust interest rates in whichever direction accommodates that shock."

Like many economists, he argues that, with rates anchored at just 0.1 per cent throughout the pandemic, the bank needs to return rates to more normal levels. But what exactly is normal?

"I think that's something in the region of three to three-and-a-half per cent," the former RBA board member says. 

That's a long way north of the current 0.85 per cent.

As for the pain that will cause, particularly if they keep on being hiked at such a rapid clip, Dr Henry admits the RBA has to take responsibility for its misstatements last year.

"They were clearly wanting to encourage people to go out and to borrow and to keep activity buoyant," he says.

"And in doing that, they were obviously aware that at some stage in the future, they were going to have to increase interest rates."

Just the prospect of further rate hikes is having an impact on Australian households. 

They're being hit by higher prices on all fronts: food, power and petrol. And with a rapid-fire spike in mortgage repayments piled on to that, they are looking at ways to curb spending, just like Ms Watt.

"We're brought up... hearing... [you should] buy a property. It's going to set you up for the rest of your life," she says.

"Which is true. But what kind of life are you living? You're cutting costs here, you can't go out and enjoy your life because rates are rising, the cost of living is rising. At what point are they going to stop increasing the rate?"

Blunt weapon: Will rate hikes work?

How much of this is of our own making? Did central banks globally hit the accelerator too hard during the pandemic? And are they now in danger of applying too much pressure to the brakes?

Justin Wolfers prefers to look to the glass half full.

A professor at the University of Michigan and a visiting professor at the University of Sydney, the rising star on the global economics front believes the benefits from all that pandemic stimulus outweighs the hangover.

"I want you to think back to how you felt in the middle of 2020, when we were all shut at home fearful of coronavirus," he says.

"If you'd offered me a choice back then: should we as policy makers do too much, which will hopefully get the economy back on track, people back to work and risk a little bit of inflation; or should we do too little?

"I would have put all my chips across the table and said, let's do too much."

The net result is that, along with an inflation breakout, unemployment is at its lowest level in nearly half a century after an astonishingly swift bounce back from the deepest recession in a century. 

"So given what was happening at the time, and the immense uncertainty, I think they made the right set of mistakes," he says.

But Professor Wolfers is well aware of the limitations of interest rates in controlling inflation, particularly when it has been caused by constrained supply.

"High interest rates don't get Putin out of Ukraine," he says. 

"High interest rates don't defeat COVID-19. High interest rates are an incredibly blunt way of trying to defeat many of our ills.

"That's an important point for the Reserve Bank to bear in mind right now. A lot of what is going on isn't in their remit."

Slower economy, lower profits

In tranquil bushland bordering the Wollemi National Park north-west of Sydney, Sebastien Bouthillette operates a business offering a unique outdoor experience.

Like the army of Australian small business owners, Mr Bouthillette has been through the wars in the past few years. Lockdowns and a complete lack of international tourists has made life tough for his nascent adventure company.

"When we started the business, we had in mind that tourism was going to be playing a big part," he says.

"We did experience lower bookings than what we were originally anticipating."

To cope with the challenges, the Canadian-born engineer and management consultant recently shifted venues to the current site near Putty.

"We're trying to reinvent a little bit ourselves, redefine our cost structure... so we can be profitable again," he says.

That's no easy task. Just as tourism is getting back on track, both domestic and international, his Outdoor Experience Factory has begun to feel the heat from rising costs.

"The gas price going up has impacted us quite a bit," he says.

"Maintenance has also increased a bit because of wage increases. The parts we need come from North America and the delay in shipping is what is hurting us the most at the moment.

"We've been hit sort of from all angles."

But Mr Bouthillette remains optimistic and is confident he has the skills to navigate whatever is thrown at him, including a decline in demand as higher interest rates slow down the economy.

"I would hope that things will bounce back in about six months," he says. 

"I would say by Christmas time, we're hoping to be sort of back to where we were. But yeah, we'll see what else life has in store for us."

'A hell of a challenge'

If COVID-19 came from way out of left field, the sudden return of runaway inflation has been equally unexpected. So too, has been the response from regulators. 

Having thrown everything and then some at saving the economy during the pandemic, they've now developed a steely resolve to stamp out inflation, regardless of the short-term consequences. 

Across the Tasman, the New Zealand Reserve Bank was among the first, not only to raise interest rates, but to push through multiple hikes in one go. 

Even more incredibly, they are pushing through rate hikes even as real estate prices are sinking. 

"It's pretty unprecedented to be raising rates as house prices fall," says Sharon Zollner.

"And not only that, raising them at double speed. But, of course, it's just an example of the same sort of thing that's going on all over the world."

It's an observation that has particular relevance to Australia, given we've been late to the party when it comes to raising interest rates.

"I would say, don't underestimate central banks' determination," she says.

"Even though, you know, house prices have been falling, the Reserve Bank accelerated its rate hikes here. They are absolutely on the warpath and its going to take something pretty nasty to derail them from that path."

The big question, though, is will it work? Can we tame inflation, just as we did in the 1990s, but avoid the decade of pain that followed, an experience that both Justin Wolfers and Ken Henry believe could have been averted.

Professor Wolfers thinks we can pull it off, that despite all the talk of recession, the red lights aren't yet flashing. 

"I expect the economy to slow," he says. "You can't grow gangbusters forever.

"The single best indicator for how it'll grow next year is how it's grown this year. It's doing OK."

Ken Henry, too, has confidence. But there is an unmistakable hint of wariness that creeps into his voice as he contemplates the future. 

"As an economist, I have to believe that it can be done," he says. "And I do believe that it can be done. 

"But I wouldn't want to underestimate the challenge. It's a hell of a challenge".

Watch this story on 7.30 on ABC TV and ABC iview.