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New Zealand's recovery from the global financial crisis is entering a new, less fragile stage Reserve Bank Governor Alan Bollard said today.
This new stage will allow monetary policy stimulus to be removed, meaning the official cash rate (OCR) would be raised in the middle of the year, Bollard's speech to the Otago and Southland Zones of Local Government New Zealand suggested.
"Conventional monetary policy will now guide the stages of recovery," Dr Bollard said.
"Overall, we are emerging from the crisis with some reconstruction of our external deficit, as a result of strong exports, weaker import growth, suppressed domestic profits, and some consolidation of balance sheets."
However he noted the recovery was still fragile in the domestic sector with businesses still behaving cautiously after the crisis and not yet looking to invest in equipment or extra staff.
He also said that credit lending from banks "continues to be extraordinarily restrained" and there were only small gains in house prices and building.
Dr Bollard said the stage is set for the Reserve Bank to influence the pace of recovery as indicated in the OCR review of last week.
"We used the words 'begin removing stimulus' deliberately (as) with the official cash rate at an historically low level of 2.5% we are clearly in a very stimulative position."
He acknowledged that markets expect the bank to begin raising the OCR in small steps from June or July and says that expectation is "broadly in line" with his plans.
However, he still did not make any firm commitments and continues to express caution.
"The timing and pace of returning the OCR to more normal levels will ultimately depend on economic developments: recovery so far has been full of surprises. There will be more to come."
The OCR rate has been at 2.5% since April last year.
