* Consolidation in markets allows cbank to cut rates-Bihari
* Hungary cbank must not wait too long with rate cut
(Adds comments, detail)
By Sandor Peto
BUDAPEST, June 30 (Reuters) - Consolidation in Hungary's financial markets has gone far enough to allow the central bank (NBH) to cut interest rates and to dampen the country's deep recession, rate setter Peter Bihari told Reuters on Tuesday.
The NBH has kept rates on hold at 9.5 percent for the past five months but it has said it would cut rates if falls in financial stability risks seen in the past months prove lasting.
Bihari, who is regarded more of a moderate than a dove in the 9-member rate-setting Monetary Council but voted for a cut in May, said the forint has firmed from record lows hit versus the euro in March.
The liquidity of the banking sector has improved and the reliance of both the state and banks on financing from abroad has dropped, he added.
"With all my effort I'm trying to say that we are on the brink of cutting interest rates," he said in an interview.
"If we wait for all risks to pass, that would mean that we wait until the end of the crisis and for a steady upturn," he added. "But that would push the date of cutting rates into the unforeseeable future, while the inflation and growth (recession) factors both urge us to act as soon as possible."
After high currency volatility which halted rate cuts around March across central Europe, central banks in the region are now reducing interest rates to help economies hit hard by the global crisis which slashed demand in export markets.
A 50 basis point cut by the Romanian central bank to 9.0 percent on Tuesday left the Hungarian base rate the highest in the European Union. Poland's central bank also cut rates last week by 25 basis points, to an all-time low of 3.5 percent.
RECESSION WARRANTS RATE CUT
Hungary had to resort to a $25.1 billion International Monetary Fund-led rescue package last year, but Bihari said reliance on external financing has dropped due to fiscal cuts and due to economic contraction which the central bank projects at 6.7 percent for this year.
The bank said earlier on Tuesday Hungary's current account deficit fell to a lower-than-expected 591 million euros in the first quarter from 1.651 billion euros in the same quarter of 2008 as recession cut the country's imports.
"Of course, this is a painful process, coming along with a fall in demand for imports due to the recession, with a decline in corporate investments and in the import need of household consumption," Bihari said. "What's positive is the decline in reliance on external financing."
One-off factors lifted inflation in April and May, and tax hikes from July 1 will cause a further rise, but the bank should look beyond these factors as inflation could drop below its 3 percent target on the monetary policy horizon, Bihari said.
The bank must remain cautious and watch any increase in inflation expectations, but the recession keeps a lid on price pressures, and the bank should cut rates if it expects to undershoot its inflation target, he added.
The bank sees annual average inflation falling to 1.9 percent in 2011 from 4.3 percent next year.
"Monetary policy must demonstrate the same sensitiveness to deviation from the inflation target both upwards and downwards: it must react to an undershoot as well, not only when it expects an overshoot," Bihari said.
The main risk is a deeper than expected recession.
"I'm not saying that cutting interest rates could cause a turnaround in recession," Bihari said.
"(But) if the central bank can do something to fight the crisis, without causing damage in other fields, it must grasp the opportunity." (Reporting by Sandor Peto; editing by Chris Pizzey)