Reserve Bank Governor Adrian Orr has addressed concerns about rising inflation and the house price bubble in a presentation to the International Monetary Fund today.
"We know the long term cost of letting inflation expectations get away," Orr told IMF acting director of the Asia and Pacific, Anne-Marie Gulde-Wolf.
Orr said it was usually true that when it was difficult to decide on policy direction, it meant you were in a good place.
"For us it's very obvious what we need to do next," he said. "Which means we're not in a great place now."
Orr stopped short of conceding that central banks had applied too much stimulus in response to the Covid crisis - a criticism they now face from some quarters as inflation surges.
"But we have been caught, like many countries, around the fact that supply constraints have been pervasive and have persisted longer than people thought," he said.
"They've persisted not because of the same reasons, but because of an ongoing series of shocks."
The oil and commodity price spikes in the wake of Russia's invasion of Ukraine were one example, he said.
Orr also acknowledged that economic demand held up much better "than some of the dark predictions back at the beginning of 2020".
Central banks would not be able to achieve their mandates around inflation and maximum sustainable employment on their own, Orr said.
"We are going to need support," he said.
That would require clear communication with "fiscal authorities" and "how they could assist around more targeted effective fiscal policies".
Those comments prompted National finance spokesperson Nicola Willis to call for more fiscal restraint from the Government.
"The Finance Minister must heed this warning," she said.
Grant Robertson should take the comments seriously and "rein in extravagant spending plans," Willis said.
BNZ senior economist Craig Ebert also highlighted the comments suggesting they were a "heads-up" to the Budget on May 19 - coming up just 6 days before the next Monetary Policy Statement.
Monetary policy was fast reducing stimulus, but fiscal policy was not, Ebert said.
"There's obvious tension there."
Earlier this morning Robertson told RNZ that inflation was high in many countries right now.
He acknowledged it was likely to get higher before falling.
New Zealand's monetary policy response to Covid was very similar to that of other central banks around the world, Orr said.
Its challenges were all "similar shades of the same challenges" that were seen globally, he said.
In response to higher than anticipated inflation the RBNZ was acting "reasonably aggressively" to tighten monetary conditions, Orr said.
He noted that the Reserve Bank had stopped its quantitative easing programme in the middle of last year and had since started to hike interest rates.
Since October last year the RBNZ has lifted the official cash rate from a record low at 0.25 per cent to sit at 1.5 per cent, following last week's 50 basis point hike.
"We've also issued strong foreword guidance that we expect to be doing more rate rises over coming months," Orr said.
RBNZ forecasts suggest the OCR will peak at either 3.25 or 3.5 per cent by late 2024.
"So there is more work to do."
The RBNZ was trying to balance traditional risks around curbing inflation and stalling the economy, he said.
"If you go too fast or too high - in fact probably more related to too high - you really run the risk of having a sharper than needed slowdown in economic activity," Orr said.
"On the other hand if you go too slow, it's inflation expectations that will get away from us."
At the moment the balance of risks was "very much weighted to constraining those inflation expectations in the medium term... we know the long term cost of letting inflation expectation get away."
Cutting interest rates to head off the Covid shock had seen asset prices surge, particularly house prices, he said.
In that era of extraordinary low interest rates people were looking for places to put their savings, Orr said.
"This shift in demand had occurred at a time when housing shortages were very prevalent in New Zealand," he said. "So the impact on house prices was dramatic."