Dec. 8 (Bloomberg) -- Central banks in South Korea and New Zealand raised interest rates to curb inflation and the Bank of Japan said it is close to ending a deflation-fighting policy.

The Bank of Korea unexpectedly raised the overnight call rate a quarter percentage point to 3.75 percent in Seoul today. The Reserve Bank of New Zealand raised its cash rate by the same amount to a record 7.25 percent. Bank of Japan Governor Toshihiko Fukui said in a speech ``an end is close'' to his policy of flooding commercial banks with cash.

The focus of Asian central banks on inflation risks reflects the strength of the region's economies, near-record fuel prices and expectations the U.S. Federal Reserve will keep raising rates. The Fed may increase rates for a 13th consecutive meeting next week and the European Central Bank increased borrowing costs this month.

``Inflation needs to be contained otherwise it becomes a longer-lasting disease,'' said Dilip Parameswaran, head of Asian credit research at Calyon, the securities arm of Credit Agricole SA. ``Oil prices are still around $59 a barrel, so that's going to be a problem for Asia.''

Asian stocks fell, with the Morgan Stanley Capital International Asia Pacific Index dropping 1.4 percent to 116.19 at 6:25 p.m. in Tokyo as stocks in South Korea, Japan and New Zealand slid. The yen strengthened to 120.33 against the dollar in Tokyo, from 121.03 late yesterday in New York. The yen has dropped 15 percent this year against the dollar.

Bank of Japan

The Fed will probably raise its target rate to 4.25 percent on Dec. 13, according to economists surveyed by Bloomberg. The Bank of Japan has left its overnight rate near zero for 4 1/2 years and the European Central Bank raised its benchmark interest rate to 2.25 percent Dec. 1, its first increase in five years.

``Economies around the world are recovering and in many places the interest rates have rather been historically low and ultra accommodative,'' said David Cohen, director of Asian economic forecasting at Action Economics in Singapore. ``That's why it's not very painful yet to raise interest rates.''

The Bank of Japan's Fukui today said his board may switch policy because consumer prices will gain in the first three months of 2006.

``It is clear to everyone that the end is close,'' Fukui said in a speech in Nagoya City, referring to the ``quantitative easing'' policy of flooding banks with cash. He later said he didn't mean policy will change in the first quarter.

Fukui yesterday met with Prime Minister Junichiro Koizumi, after months of tension over the timing of a policy change.

Agreement Reached?

``Fukui's comments following his meeting are leading investors to believe the bank has been authorized to end quantitative easing,'' said Koji Shimamoto, chief strategist in Tokyo at BNP Paribas Securities Japan Ltd., the second-highest ranked Japan bond analyst by Nikkei Bonds and Financial Weekly.

Cutting the reserves provided to banks would be a precursor to a rate increase in Japan, which would mean borrowing costs are rising in all three of the world's global economies for the first time since 2000. Bank of Japan Deputy Governor Toshiro Muto said on Dec. 2 that the bank will probably keep rates close to zero after a policy shift.

The economy may grow at about a 2 percent annualized pace this and next fiscal year, Fukui said. Japanese people are starting to expect prices to rise, rather than fall, he said.

``It is highly likely that consumer prices will become positive as a trend,'' Fukui said. ``Core consumer prices will show solid gains in the January-to-March period.''

Koizumi's government has been concerned a policy change would push up yields on the nation's debt, which is projected to reach 151 percent of gross domestic product by March.

Bank of Korea

South Korea's central bank unexpectedly raised rates for the second time in three months, as an accelerating economy threatens to spur inflation. All nine economists polled by Bloomberg expected the bank to leave the rate unchanged.

``The central bank is taking a preemptive action,'' said Im No Jung, an economist at Hanwha Securities Co. in Seoul. ``Confidence is rising, sales are picking up and the central bank is looking at higher growth next year.''

Core inflation, which excludes food and energy, will probably accelerate to 3.3 percent in the second half of 2006 from 2.1 percent in the first half, the central bank said on Dec. 6. Core inflation has lagged the bank's 2.5 percent to 3 percent target for six months.

The central bank on Dec. 6 predicted economic growth of 5 percent in 2006, the fastest pace in four years.

New Zealand

New Zealand's central bank raised its benchmark rate, saying the ninth increase since January 2004 is needed to curb household spending and inflation.

``We remain concerned about the tightness of resources and the persistence of inflation pressures,'' Reserve Bank Governor Alan Bollard said in Wellington today.

Bollard, tasked by the government with keeping inflation between 1 percent and 3 percent, said he doesn't see any prospect of cutting the rate, the highest of any nation with the top credit rating at Moody's Investors Service. Inflation will stay near 3 percent for the next two years, he said.

`Too Optimistic'

Spending in New Zealand's $97 billion economy has been buoyed by a record low jobless rate and a 15 percent jump in house prices the past year. Bollard, whose policies have been criticized by business leaders, said there's a risk rate increases may stall the economy.

``The Reserve Bank is being too optimistic about how resilient the economy will be,'' said Nick Tuffley, senior economist at Westpac Banking Corp. ``They could get a rude surprise.''

Westpac expects the economy will expand just 1.9 percent next year. Bollard today forecast 2.4 percent growth in 2006.

To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net

Last Updated: December 8, 2005 05:37 EST