Conway said inflation was the “monster” and the bank “needed to look the beast in the eye.”

His comments come as the bank prepares to lift the official cash rate again and economists have recently increased their forecasts for the peak OCR this cycle.

Conway said that last week's 7.2% inflation jump was a lot higher than the Reserve Bank's own forecast of 6.4%.

He blamed both tradable and non-tradable inflation, saying domestic inflation came in at 6.6%, largely driven by construction costs and council rates. And that was similar to the RBNZ's forecasts.

But he conceded the RBNZ got it wrong on imported inflation, and thereby lay danger.

“Inflation coming in over the border was 8.1%, where we were expecting 6.5%,” he said.

And this was a problem, because it meant a useful ally in the fight against inflation was slipping away.

“Tradable inflation is usually our friend,” Conway said.

“Over recent decades it has been low to negative, across the globe.”

Conway's argument was that low or non-existent price rises overseas would help pull down the inflationary average within New Zealand.

He added there were reasons for several years of low international inflation, such as globalisation, favourable demographics and high level, low cost production within China.

“But much of that is changing, in the first instance because of the pandemic,” Conway said.

“But also, globalisation is changing, demographics are changing and China is not the deflationary force it once was.

“There is talk, in serious academic papers, arguing that greater international inflationary pressure could be a theme going forward.

“It hopefully will not be as extreme as what we have been witnessing over the past year or so, but that era of helpful tradable inflation may be coming to an end.”

Conway listed several positives for New Zealand, such as high employment and strong household budgets, as people paid back debt during the pandemic.

And despite the dangers from imported inflation, he was hopeful that inflation might have peaked.

“In no small part, monetary policy works,” he said. 

He was speaking to the Commonwealth Bank Global Markets Conference in Sydney by Zoom from Wellington.