Paul Conway, the chief economist at the Reserve Bank of New Zealand (RBNZ), has said that significant progress is being made in returning inflation to its target.

However, he stressed the need for a phase of restrictive policies to ensure confidence in achieving this objective.

Conway added that the increasing spare capacity in the economy, including easing in the labour market, is expected to continue reducing inflationary pressures in the future.

“Lower inflation expectations and a lower propensity for firms to make relatively large price increases will help lower inflation persistence,” he stated.

However, the central bank’s chief economist added that the process could happen faster or slower than forecast.

The RBNZ has embarked on its most aggressive tightening of policy since 1999, when the official cash rate was first introduced, raising it by 525 basis points since October 2021 to 5.50%. 

In May, it indicated a potential for further increases if inflation and inflation expectations do not align with its target range of 1% to 3%, Reuters reports.

Inflation in New Zealand stood at 4.0% in Q1 this year, and Conway said the RBNZ forecast inflation to revert to its target band by the end of this year.

“We face some remaining challenges and uncertainties in bringing inflation sustainably back to target,” he said.

Conway further commented that the central bank anticipates spare capacity will start to be seen in the economy throughout 2024, following several years of economic growth that exceeded its sustainable pace.

“We expect this spare capacity to feed through strongly into lower domestically generated inflation,” he added.

First quarter economic growth data for New Zealand is scheduled for release on Thursday, with a Reuters poll of 13 economists forecasting annual growth of only 0.2%.