Interest rates in Asia and Pacific likely to rise soon

London : Central banks in Asia and the Pac-ific signalled yesterday interest rates may rise sooner than expected, opening up a widening gap to their European counterparts which are inching only slowing away from emergency support measures.

South Korea's central bank said current rates were too low for an economy expected to grow around 5 per cent next year and the Reserve Bank of New Zealand pulled back from a pledge to stand pat until late 2010.

A surprise jump in employment in Australia fuelled speculation rates might rise again in February, following three hikes in as many months as from the Reserve Bank of Australia.

Investors betting on an even bigger yield advantage in future over still-low policy rates in the United States and Europe pushed the Kiwi and Aussie dollars up around 0.5 per cent against the US dollar.

"Australia clearly has the strongest economy in the developed world," said Craig James, chief economist at CommSec.

Meanwhile in Europe, policy makers said they saw only a slow recovery, and another rate cut by Iceland's central bank underlined the persistence of weak spots in the rebound.

"The world economy has turned, after a drop, to growth, but growth has started unevenly," European Central Bank Governing Council member Erkki Liikanen said. "In the euro area, growth has been more sluggish than in many other economic areas."

The ECB last week kept rates on hold at a record low 1 per cent and announced plans to gradually pull back its liquidity lifeline, with no rate rises seen until late 2010.

In a similar vein, the Swiss National Bank left its rates target on hold at 0.25 per cent yesterday and repeated its pledge to counter any further rise in the Swiss franc against a backdrop of a still-fragile economy and risks of deflation.

But the Swiss central bank did drop its offer to buy corporate bonds and its tone on FX intervention, the first sign it was easing drastic measures adopted in March to fight the deepest recession in Switzerland in over three decades.

The Bank of Korea also kept rates on hold at a record low but BOK Governor Lee Seong-tae said the bank needs to act in a pre-emptive manner before "problems" materialise.

"We should move near to the door for a timely exit. Now we are away from the door," he told reporters.

"The current 2 per cent rate is too low given the 5 percent economic growth [seen for 2010]," Lee added.

Bond prices tumbled across the board and the yield curve flattened as investors, who had earlier expected the policy rate to stay on hold for several more months, rushed to increase bets on a rate rise in the first quarter — a similar timeframe to that seen for hikes in New Zealand and Australia.

The Reserve Bank of New Zealand (RBNZ) held its cash rate at a record low of 2.5 per cent, as widely expected.

But Governor Alan Bollard said the pace of recovery may back a start to removing monetary stimulus from the middle of 2010, a sharp change to the stance at its last meeting in October of keeping rates on hold until the second half of 2010.

"We're now seeing an economy where some of the background conditions are slightly stronger," Bollard told reporters.

Markets are pricing in a 90 per cent chance of a March rate hike, while across the Tasman analysts saw more than 70 per cent chance of the RBA hiking in February, up from less than 50 per cent earlier this week, after jobs growth beat expectations.

Australian employment rose by more than 30,000 in November, taking gains for the past three months to almost 100,000 jobs — a stark contrast to other developed nations where firms are still shedding labour with abandon.