* Q2 0.1 pct growth surprises after 5 qtrs of contraction
* NZ economy still 2.1 pct smaller than a year ago
* Pressure seen increasing on cenbank to advance rate hikes
* Markets sees greater chance of a rate rise in January
* NZ dollar surges, debt sold after data (Updates market reaction)
By Mantik Kusjanto
WELLINGTON, Sept 23 (Reuters) - New Zealand's economy unexpectedly grew in the second quarter, ending its longest recession on record and raising expectations the central bank may start raising interest rates as soon as January.
The kiwi dollar jumped after data showed gross domestic product rose a seasonally adjusted 0.1 percent in the second quarter, compared with a revised 0.8 percent drop in the previous three months and ending five straight quarters of contraction.
Economists in a Reuters poll had forecast a 0.2 percent contraction, while the Reserve Bank of New Zealand (RBNZ) had predicted a 0.1 percent fall.
Growth was driven by gains in domestic consumption and primary industries, including forestry and mining, which analysts said may prompt the RBNZ to reconsider its stated policy of keeping rates at record lows until late 2010.
"The market is going to continue to push for the bank to tighten policy much sooner than what the bank is currently stressing," said Deutsche Bank chief economist Darren Gibbs.
Markets now see an 80 percent chance of a quarter point rate rise in January, up from less than 50 percent before the data, according to overnight indexed swaps. An increase in March has already been fully factored in.
The New Zealand dollar, a favourite of international investors seeking higher returns, surged more than 1 percent to a near 14-month high of $0.7315, before settling back to around $0.7265 at 0415 GMT.
Bank bill futures sold off by as much as 20 basis points, while one- and three-year swap rates both jumped 6 basis points to 3.22 percent and 4.87 percent respectively.
PRESSURE ON RATES
The RBNZ's oft-stated intention to hold rates at current or lower levels was seen as under further pressure from the data.
"The bank will need to normalise rates sooner than the market had discounted," said Sue Trinh, a senior currency strategist at RBC capital Markets.
The RBNZ had said in its latest statement on Sept. 10 it "would expect to eventually tighten monetary policy, if the economy recovers as projected", although it projected only a "patchy recovery" with a weak an uncertain outlook.
The central bank slashed its cash rate by 575 basis points between July 2008 and April this year to 2.5 percent to support the economy, but has been on hold since then.
A Reuters poll, conducted before the GDP data release, had a majority of the 14 economists expecting the next move to be a hike in the middle of 2010.
As the possibility of an early RBNZ hike comes into view, short-term rates are expected to keep rising more quickly, causing the swap curve to flatten. The one-/three-year spread is at 165 basis points, near a record peak of 170 basis points reached in August.
A Credit Suisse measure shows the market is now pricing in around 150 basis points of tightening for the next 12 months, up from 126 basis points early this week.
CAUTION
Finance minister Bill English said the economy was through the bottom of the trough and was stabilising, but still faced pain. Despite marginal quarterly growth, the economy shrank 2.1 percent from a year earlier.
"However for most people the real measure of recession is unemployment, which is expected to keep rising for some time yet," English said after the data release.
Unemployment hit a six-year high of 6 percent in the second quarter and is expected to rise as high as 7.5 percent next year.
Household consumption, which makes up around 60 percent of the economy, increased 0.4 percent in the June quarter, the first increase since December 2007 quarter.
New Zealand also reported this week migration gains hit a five-year high while dairy giant Fonterra posted stronger export demand and raised its payout to farmers by 12 percent, worth around NZ$700 million extra for the economy in the coming year. ($1=NZ$1.41) (Additional reporting by Gyles Beckford, Adrian Bathgate and Catherine Trevethan) (Editing by Kazunori Takada)