MONEY MARKETS-New Zealand sees early rate hike amid recovery

By Umesh Desai

HONG KONG, July 29 (Reuters) - New Zealand's markets are factoring in a rise in the benchmark official cash rate early next year but some analysts see opinion shifting towards such a move happening only in late 2010, a view expressed by the central bank.

The Reserve Bank of New Zealand (RBNZ), is expected to keep its official cash rate steady at 2.5 percent on Thursday amid emerging signs of further stabilisation in the recession-hit economy. [ID:nWEL405915]

The central bank has pledged to keep its cash rate at or below 2.5 percent until at least the latter part of 2010, and it is expected to reaffirm that pledge, although swaps market are anticipating a move up by March 2010.

The nine-month overnight indexed swaps was quoted at 2.59 percent, 3 basis points higher than Tuesday. It has shot up by 13 bps in the past two weeks.

The 3-month interest rate swap starting after nine months was quoted 4 bps higher at 3.525 percent.

"The rate market is pricing in a hike by March and April. We think eventually the market will shift towards the RBNZ's view," said Philip Borkin, markets economist with ANZ-National Bank.

"The central bank will acknowledge the signs of improvement that have emerged in the economy. But they will also be circumspect about the pace of recovery and remain cautious in saying there are still downside risks that remain for the economy."

In another sign of improvement in economic conditions, the National Bank of New Zealand's monthly survey showed its headline measure of sentiment rose for the fifth straight month, to a 7-year high, but it is not seen as a harbinger of higher rates.

"This is not a report calling for RBNZ tightening," said TD Securities senior strategist Annette Beacher, adding the data "merely justified taking the last easing off the table".

Meanwhile, Australian monetary authorities are gradually seen shifting towards a neutral bias from its earlier dovish stance after its top central banker warned that low interest rates could inflate a housing bubble.

These comments have boosted the Australian dollar and interbank futures <0#YIB> are factoring in a more than a 50 percent chance of a 25-basis-point rate hike by December.

The overnight indexed swaps for four months have jumped above the 3 percent benchhmark rate from a low of 2.89 percent earlier this month.

"We expect the Reserve Bank of Australia (RBA) to formally adopt a "neutral" stance in policy at next week's August Policy Board Meeting," said Societe Genrale's Glenn Maguire in a report.

On Tuesday, RBA Governor Stevens said the country's slowdown was not proving as serious as first feared and also highlighted the danger of an asset price bubble if the low mortgage rates led only to higher home prices rather than more home building.

Maguire expects the central bank to remove the phrase "there is scope for some further monetary policy easing" from its post-meeting statement to be released next Tuesday.

In Asia, the cost of borrowing dollars rose marginally even though London interbank offered rates (Libor) for dollars, fixed at 0.49125 percent , fell below 0.5 percent for the first time ever.

"It is essentially the month end demand which is pushing rates up slightly higher. ," said Suresh Ramanathan, strategist with CIMB Bank in Kuala Lumpur.

Three-month Singapore interbank dollars were quoted at 0.50571 percent, up from the previous 0.50286. (Reporting by Umesh Desai; Editing by Kim Coghill)