"New Zealand has been fortunate in some respects, allowing most of our crisis liquidity and guarantee measures to be terminated.  Conventional monetary policy will now guide the stages of recovery," says Dr Bollard.

In the Official Cash Rate Review last week the Reserve Bank (RB) noted: '...we expect to begin removing policy stimulus over the coming months, provided the economy continues to evolve as projected.'

Dr Bollard says the RB used the words 'begin removing stimulus' deliberately as the official cash rate is at an historically low level of 2.5% and it is 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.

"Financial markets currently expect 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.  This is broadly in line with our current views as outlined at last week's OCR Review."

However, he says 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. 

"But a final caution: recovery so far has been full of surprises. There will be more to come."

"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." 

On the other hand, he says the domestic sector is seeing a more fragile recovery, with business bruised but not permanently scarred.

"It is behaving very cautiously, still not looking to invest in plant and equipment or re-employ staff." 

Dr Bollard says banking sector credit data continues to be extraordinarily restrained and whatever the explanation, the Reserve Bank certainly wishes to see credit available for all sound business ventures. 

In the household sector, there has been only a soft pick-up in house prices, new building and sales as householders are building up savings and reducing debt.