The economic recovery is proving "brittle, uncertain, and full of surprises", says Reserve Bank Governor Alan Bollard.

Compared to many countries, New Zealand was hit less hard during the global financial crisis, but any expectations of an easy recovery during this year had been dispelled, Bollard said in the Reserve Bank of New Zealand annual report, published today.

"We have now emerged from a long recession, and have experienced some quarters of significant growth.

"This has been helped by growth in Asia and Australia. But Europe has disappointed with its frail fiscal picture, the US has suffered a very weak labour market, and Japan continues to struggle with deflation," Dr Bollard said.

The report shows the Reserve Bank recorded a loss of $111 million for the year to June 30, with that figure including unrealised losses due to revaluations on assets and liabilities.

Most of the losses were on the bank's unhedged foreign exchange position, as exchange rate and interest rate movements partially reversed the large unrealised gains of the previous year, Dr Bollard said.

Underlying income from interest earnings, and operating costs, had been stable.

The bank paid a dividend to the Government of $290m for the 2010 year, leaving the bank with equity of $2.57 billion. That dividend followed a voluntary dividend payment in April of $45m, which the bank determined was surplus to its capital needs.

A return to normality, after the global financial crisis, could be managed through the traditional monetary tool, the official cash rate (OCR), said Bollard.

Government spending, which was stimulative during the recession, was now more restrained.

That was appropriate in view of the financial markets' renewed focus on the sustainability of sovereign debt issuance.

Monetary policy had also been stimulative over the period of the crisis, and together with a number of special policies, helped mitigate the worst of the effects, Bollard said.

A temporary weakening of the New Zealand dollar had also helped recovery.

Now, most of the crisis policies had been withdrawn or were time-limited, including most of the special liquidity facilities for banks and other institutions, the Government's retail deposit guarantee scheme, the wholesale deposit guarantee, and the bank's increased foreign reserves position.

Bollard also said the Reserve Bank was examining the potential for using a core funding ratio as a device to stabilise the financial cycle in this country.

Experiences of the past few years pointed to the illiquidity of bank funding under certain conditions, and for that reason the Reserve Bank had introduced a liquidity policy with funding matching criteria and a core funding ratio.

Bollard used his statement in the annual report to again warn about the dangers of passing through administered price rises, including the increase in GST.

"So far, the pass-through to inflation appears muted, but any ongoing inflationary effect would present a challenge for monetary policy," Dr Bollard said.

"It is critical that businesses and labour groups do not try to use the GST rise as a veil to increase margins and remuneration.

"This means restraint by the electricity sector, other utilities, local government, and others who have a record of using strong market positions to push up prices."