MONEY MARKETS-Australia prices rate hikes, China sees tightness

HONG KONG, July 28 (Reuters) - China factored in tighter liquidity and Australia priced in higher rates on Tuesday following upbeat comments from their respective central banks about their economies.

Reserve Bank of Australia Governor Glenn Stevens said low interest rates could inflate house prices and that the central bank was not barred from raising rates before a peak in the jobless rate, stoking a rise in swaps.

In China, rates continued to rise at the central bank's open market operations but the pace of increase has slowed. However, the central bank's comments about a possible rebound in consumer prices attracted paying pressure in the swaps market.

The 1-year IRS CNYQB7R1Y= was up 6 basis points at 1.94 percent. It has risen from 1.53 percent in end-June and struck an 8-month high of 2.08 percent earlier this month.

A report from the People's Bank of China released on Tuesday said the consumer price index will stablise in the second half of this year and rise thereafter, predicting a bottom for the index in the third quarter. [ID:nHKG182662]

The central bank also said China's growth recovery in the second quarter had been stronger than expected, at 14.9 percent on an annualised, seasonally adjusted basis.

"On the one hand they have reiterated their monetary stance but then on the other hand they have warned about asset bubbles," said Frances Cheung, fixed income strategist with Standard Chartered Bank.

She said authorities were trying to manage expectations, that the central bank would not loosen liquidity any further and that any tightening would be gradual.

Last week, China's top leadership reaffirmed the country's "appropriately loose" monetary stance and on Monday Premier Wen Jiabao said policy would remain stable and consistent.

Money market rates in China have been volatile in recent weeks also because of fund flows on account of recently revived IPOs.

The central bank has been nudging up rates at its open market repo operations but that pace has been gradually moderating. On Tuesday, it auctioned one-year bills at a yield of 1.6984 percent, just below a market forecast of 1.7 percent.

That marked a rise of around 5 basis points, similar to the rise in the prior week but smaller than the 9 basis point increase in the week before that.

"The front end has reacted too much. Inflation is still not a concern at this stage," said Cheung. "We are recommending receiving in the short-term IRS, specially for the one year."

Australian swap rates AUDIRS rose and bill futures <0#YBA:> dived on speculation the next move in rates would not only be up, but earlier than previously thought.

The shift was inspired by comments from RBA Governor Stevens who 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.

Aussie dollar one-year swaps starting a year from now AUDSM6AB1YF1Y= have risen to 5.347 percent from a low of 4.5 percent earlier this month. It added over 10 bps on Tuesday.

Two-year interest rate swaps AUDQM3AB2Y= rose to 4.45 percent, adding over 10 bps. It has extended a rise from this month's low of 3.78 percent.

But analyst said the market had factored in too much tightness in rates.

"It seems more apparent today that they are on hold and subject to the global and domestic economy continuing to improve at some stage they will be raising rates," said Adam Donaldson, head of debt research at Commonwealth Bank.

"But it didn't sound like it is imminent," he said, while suggesting investors receive one-year swap rates. (Reporting by Umesh Desai; Editing by Neil Fullick)