BUDAPEST, Oct 22 (Reuters) - Hungary's central bank (NBH) can cut rates further if the country's risk assessment improves and risk indicators point into the right direction, Governor Andras Simor told Gazdasagi Radio on Thursday.
The bank has cut its base rate by altogether 250 basis
points to 7.0 percent
Simor said the country's risk assessment was the "bottleneck" for further monetary easing as the bank expects inflation to fall below its 3 percent target in the medium term.
The main indicators watched by the bank are Hungary's CDS (credit default swap) spreads, yields on the country's forint and foreign currency bonds, the forint exchange rate and the access of commercial banks to financing, he said.
"I must say that all of these are moving in the right direction, though not at the same pace," Simor said.
The governor added, however, market expectations for the pace of rate cuts may overshoot.
"That risk exists in theory, therefore it would not be the right thing for the Monetary Council and central bankers to look at only what the market is pricing in and the interest rate cuts it expects," he said.
Most analysts expect the NBH's base rate to bottom out at around 5.5 percent by the middle of next year according to a Reuters poll last week.
ONLY 2 YEARS IN ERM-2
Simor reiterated that it would not make sense to discuss before elections in April or May the country's future entry to the Exchange Rate Mechanism (ERM-2).
He added that Hungary should not spend more than two years in the ERM-2 where euro zone candidates must keep their currency for at least two years before adopting the euro.
"It would not be reasonable to stay in the ERM-2 for a long time," Simor said.
"It's worth entering (ERM-2) only when we see a realistic chance that we can enter the euro in two years," he added.
Hungary has no official euro zone entry target date. Analysts forecast 2014 or 2015.
The governor said discussing ERM-2 membership was also
premature because the country would need some time to see
clearly at what levels the forint currency
"It is very difficult to decide after the crisis, after big (exchange rate) volatility, where the realistic exchange rate balance is, where it would be reasonable to enter the euro... (and) where it would be also reasonable to have the initial midpoint of the (30-percent-wide) ERM-2 (flotation) range," he said.
(Reporting by Sandor Peto; Editing by Ron Askew)