Taxonomic diversity effects on forest productivity and response to climate extremes range from positive to negative, suggesting a key role for complex interactions among neighbouring trees. To elucidate how neutral interactions, hierarchical competition and resource partitioning between neighbours shape tree growth and climate response in a highly diverse Amazonian forest, we combined 30 years of tree censuses with measurements of water and carbon related traits. We modelled individual tree growth response to climate and neighbourhood to disentangle the relative effect of neighbourhood densities, trait hierarchies and dissimilarities. While neighbourhood densities consistently decreased tree growth, trait dissimilarity increased it, and both influenced climate response. Greater water conservatism provided a competitive advantage to focal trees in normal years, but water spender neighbours reduced this effect in dry years. By highlighting the importance of density and trait-mediated neighbourhood interactions, our study offers a way towards improving predictions of forest response to climate change.