By Sandor Peto
BUDAPEST, Jan 12 (Reuters) - Hungary's central bank (NBH) should continue monetary easing and the pace of rate cuts should be faster than the 25 basis point reduction delivered last month, rate setter Tamas Banfi said.
Banfi said the NBH base rate, which now stands at 6.25 percent, should reach the bottom in the current easing cycle at lower levels than analysts' median forecast of 5.5 percent.
"At the current (forint) exchange rate level (at around 267 against the euro) I'm not sure that we would need to slow the pace of interest rate cuts (from 50 basis point steps before Dec)," he told Reuters in an interview conducted late on Monday.
"I don't see a reason ... why we should not return to the 50 bps rate cut steps if we can," he added.
The bank's Monetary Council will hold its next rate setting meeting on Jan. 25.
A strong majority of the panel voted last month to slow the pace of cuts to 25 basis points. The reductions have brought down the base rate by a total of 325 basis points since July.
The bank said Hungary's vulnerability to its high debt and the fragility of global markets warranted caution despite the country's deep recession which has reduced inflation pressures.
But Banfi, who proposed bigger cuts in the past months, said the economy needed monetary easing as fast and as deep as possible to help industrial and agricultural output recover.
"If the conditions we consider allow, we should cut rates, exploiting all the room we have and deliver the biggest possible cut," he said.
The NBH has estimated last year's economic contraction at 6.5 percent and expects a further 0.6 percent fall this year.
Banfi said Hungary's external financing need had fallen and the international market environment was favourable for cutting rates, even though a shift in the global sentiment and a rise in the budget deficit remained risks which the NBH should consider.
Another rate setter, Csaba Csaki said last week that the NBH should take a pause in its rate cuts in March, before April's elections which the opposition party Fidesz is expected to win.
Banfi said pauses would be possible if they are justified by increased risks but rate setters should not take elections into account.
"I trust that there is no political risk as the interests of the new government will be identical with the interests of the economy and society," he added.
TROUGH DEEPER THAN 5.5 PERCENT
The bank should reach the bottom of the easing cycle before the last months of the year, as late in 2010 the U.S. Fed and the European Central Bank are likely to start to hike their own interest rates, Banfi said.
"It would be strange then if Hungary is still in the interest rate cut trend in that period, " he said. "By then we should go to the lowest level allowed by the financing environment."
Analysts expect the NBH base rate to reach the trough at 5.5 percent. Asked whether that forecast was realistic, Banfi said: "This level is below 5.5 percent."
He declined to forecast the level, saying that it would be determined by the tolerance of investors and the needs of economic recovery.
He added, however, that a weaker forint could curb the imports of goods, including food, and help keep the country's external financing need low.
"I suppose that the representatives of various producer groups, if asked, would not regard the current exchange rate levels (around 267 to the euro) as appropriate, he said." (Editing by Stephen Nisbet)