NZ economy trucking again: Bollard

Alan Bollard. Photo / Mark Mitchell

Reserve Bank Governor Alan Bollard says New Zealand's recovery from the global financial crisis was entering a "new, less fragile stage" but the bank will keep its "foot on the gas" to keep the economy growing.

"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," he said in a speech this morning to the Otago and Southland Zones of Local Government New Zealand in Dunedin.

New Zealand had seen most of its crisis liquidity and guarantee measures terminated and conventional monetary policy would now guide the stages of recovery.

Last week the bank left OCR unchanged at 2.5 per cent. It has been at this historically low rate for a year now.

In last week's review the bank said it expected to begin removing policy stimulus over the coming months, provided the economy continued to evolve as projected and Bollard said the wording was deliberate.

"With an official cash rate at an historically low level of 2.5 per cent we are clearly in a very stimulative position.

"Using a truck driver analogy, our foot is strongly on the accelerator. Over coming months we expect to reduce the pressure on this pedal, but in effect to keep some throttle going.

"Truck drivers know they must reduce acceleration long before the corner. We are not talking about tightening policy yet. We do not expect to have to touch the brake pedal for the some time."

Bollard said financial markets expected the Reserve Bank to begin raising the official cash rate around the middle of the year and continue to do this in small steps for some time.

"However, the timing and pace of returning the OCR to more normal levels will ultimately depend on economic developments. Both markets and ourselves foresee that the official cash rate will not need to rise as far in this cycle as it did in the last one.

However, he cautioned the recovery so far had been full of surprises.

The domestic economy was seeing a more fragile recovery, with business bruised but not permanently scarred. It was behaving very cautiously, still not looking to invest in plant and equipment or re-employ staff.

"Banking sector credit data continues to be extraordinarily restrained. Whatever the explanation, we certainly wish to see credit available for all sound business ventures."

In the household sector, there had been only a soft pick-up in house prices, new building and sales. Householders were building up savings and reducing debt, he said.

- NZPA