Wellington, March 11 NZPA - Banks seem keen to lend more to businesses and households but both sectors have became more cautious as they deal with fallout from the recession, Reserve Bank Governor Alan Bollard told MPs today.

Dr Bollard appeared before Parliament's finance select committee to explain his decision to leave official interest rates unchanged at a record low 2.5 percent, as households remain cautious and business spending weak.

He told MPs that banks seemed to have opened their lending books for business after last year taking a highly restrictive approach as they dealt with the international credit crunch that saw many of the world's largest banks fall into ruin.

Dr Bollard said the banking sector in New Zealand was in a good state and banks had access to cash though it was costing them more to raise money.

Banks would look like to be lending more money out but there was little demand from businesses or households as they sought to reduce debt or save more.

This was helping to rebalance the economy, but it was not known whether the behaviour was a temporary reaction to the economic crisis or a permanent shift.

The bank expected economic growth of about 1 percent growth per quarter but from a very low base and with business only cautiously moving to hire more people.

Inflation was running at around 2 percent, but would rise this year as increases in ACC levies and costs of the emissions trading scheme pushed prices up.

Despite these pressures inflation was expected to stay within the Reserve Bank's targets over the medium term.

Dr Bollard indicated he continued to expect to start lifting the official cash rate (OCR) around the middle of 2010.

The Monetary Policy Statement pointed to a rise in the New Zealand dollar in the second and third quarters of 2009, and an increase in the cost of bank and corporate funding, as factors reducing the level of the OCR needed to achieve a desired level of interest rates for households and firms.

Domestic financial conditions were much tighter than would normally be associated with a 2.5 percent OCR, the bank said.

Reserve Bank estimates suggested the marginal cost of bank funding had risen to about 150 basis points above the OCR, from about 20 to 30 basis points before the financial crisis.