WELLINGTON, June 19 -- A period of restrictive policy is necessary to ensure inflation will return to target over a reasonable timeframe, Reserve Bank of New Zealand Chief Economist Paul Conway said on Wednesday.

Compared to other countries, tightness in the labor market, brought about by the border closure, played an important role in generating inflation in New Zealand, Conway said in an online webinar from Wellington.

Inflation in New Zealand has recently slowed significantly. But it remains higher than both pre-pandemic levels and the central bank's monetary policy committee's 1 to 3 percent target range.

Inflation spiked higher during the pandemic on a mix of supply and demand-related factors. Shortages of labor and materials, in an environment of high demand, were key in driving up inflation, Conway said.

He mentioned some remaining challenges in bringing inflation sustainably back to target, such as the emerging spare capacity in the economy that will feed through into lower domestically generated inflation.

"Lower inflation expectations of firms and households will help reinforce the slowdown in inflation, with less pressure to raise prices and demand higher wages," Conway said, adding as inflation continues to fall, businesses will be less able to make large price increases, which will help lower inflation persistence in New Zealand.

The extent to which broad momentum in domestic inflation continues is a key upside risk, he said, adding this is partially offset by the potential for a quicker fall in inflation expectations and a more rapid passthrough of weaker demand to prices.

Inflation has been at the forefront of national and global discussions and concerns since part way through the COVID-19 pandemic, Conway said, adding annual consumer price inflation in New Zealand, and most other countries, reached rates not seen since the inflation-targeting era began more than a generation ago.

  - Xinhua