* Papademos: Bond yield rise need not reflect rate bets
* Papademos: Economic worsening slowing
* Liikanen: ECB never precommits, no decision on rate bottom
By Stanley White and Brett Young
KYOTO, Japan/HELSINKI, June 9 (Reuters) - Higher yields on government bonds do not necessarily reflect expectations of higher interest rates, European Central Bank Vice-President Lucas Papademos said on Tuesday.
Yields on government bonds in Europe, Japan and the United States have been rising as indicators in major economies point to a stabilisation in the economic downturn.
Although fellow ECB policymaker Juergen Stark said late on Monday the bank would raise rates again as soon as the economy began to pick up and inflation pressures rose, Papademos said this expectation was not driving the rise in yields.
"Recent increases in bond yields can be a consequence of various factors and need not reflect expectations of increase in short-term interest rates in the future," Papademos told reporters in Kyoto, western Japan.
The rise in market interest rates presents a problem for central banks because it could translate into higher borrowing costs and slow the pace of recovery. ECB President Jean-Claude Trichet said last week the bank was looking carefully at the rise, which could reflect higher inflation expectations.
Yields on interest rate sensitive two-year government bonds have risen more than a third of a percentage point since the start of May, and 10-year yields are up about half a percentage point although most economists expect the ECB to keep rates on hold through 2010.
PUBLIC SPENDING PRESSURES
The Bank of Finland said in a report published on Tuesday that rising public spending as well as hope of a recovery might be driving the increase in yields.
"Long-term interest rates have increased due to the rise in public sector indebtedness, but also due to increased confidence in a gradual improvement of the economy," said the report, released at a news conference with ECB Governing Council member Erkki Liikanen.
"Also, long-term inflation expectations have gone up slightly as deflation fears have decreased."
In a speech late on Monday, Stark said rising yields may signal reduced investor willingness to loan long-term funds, as well as difficulty in accessing capital market funds, and borrowing costs could continue to climb.
"Looking ahead, as the economy recovers and competition for financing increases, governments may face higher bond yields again," Stark said.
Papademos said the central's bank's current benchmark rate of 1.0 percent is appropriate, adding the usual ECB caveat that it doesn't precommit on the future path of interest rates.
'NO RAPID RECOVERY'
Asked about Stark's warning that rates would rise when the recovery took hold, Liikanen also said: "We never precommit on rates." He added: "We have not taken the decision that this is the lowest level."
Benchmark interest rates were at exceptionally low levels, he told reporters. "The alleviation of inflation pressure in the euro area has given room to the ECB (to lower rates) ... when economic development has significantly weakened."
Liikanen said the worst of the global recession may be past, while Papademos said the pace of decline was slowing in the euro area.
"Recently, there have been some signs of a stabilisation of the economic situation," Liikanen said. "Even if we may have passed the phase of sharpest declines in output, no rapid recovery in the world economy is in view."
Papademos said the euro area economy will remain weak this year, but the pace of deterioration is slowing as governments' stimulus spending filters through.
ECB staff predicted on June 4 the euro zone economy could now shrink by up to 5.1 percent this year, compared with their previous worst-case scenario of a 3.2 percent decline. They signalled it would also struggle to grow in 2010 -- forecasting a change in GDP of between -1 percent and +0.4 percent.
Papademos and Stark both said inflation was well under control in the euro zone and there was no big deflation risk. (Additional reporting by Shigeo Kodama and Tetsushi Kajimoto in Kyoto and Brett Young in Helsinki, writing by Sakari Suoninen; Editing by Ruth Pitchford)