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BUDAPEST, Dec 10 (Reuters) - Hungary's central bank (NBH) is likely to meet its inflation target already next year but it can further cut interest rates only cautiously as forint weakness remains a risk, NBH Governor Andras Simor said on Wednesday.
The bank cut interest rates by 50 basis points to 10.5
percent on Monday
The currency has since firmed and stabilised and was trading at 262.90 versus the euro at 0950 GMT.
Simor said the timing and pace of further easing depended on an improvement in the risk assessment of Hungary's assets.
"We need to preserve the stability of the economy and we thought that this stability is not strong enough for interest rates to be lowered more quickly," he told parliament's economic committee.
"If we lowered interest rates more rapidly, we would risk a significant weakening in the (forint) exchange rate," he said.
"We have to proceed on a very narrow path, but we will proceed. As to when and at what pace? At such a pace that is in line with an improvement in Hungary's risk assessment," he said.
Simor defended the bank's policy following complaints by companies that high interest rates exacerbated the woes of the economy which is on the brink of a recession.
Opposition and government politicians have also urged interest rate cuts in recent weeks.
The October emergency rate hike and a $25.1 billion International Monetary Fund-led rescue package helped avert a speculative attack against the country's markets but stability has not been fully restored, Simor said.
FORINT WEAKNESS A RISK Inflation is seen falling quickly as the economy slides into recession and the inflation rate is expected to fall below the bank's medium-term target of 3 percent by the second half of 2009, but the forint may weaken again if rate cuts are too quick, Simor said.
A sharp weakening of the forint would hit households and companies which heavily borrowed in the past years in foreign currencies, the banking system and economic growth, he added.
"According to our calculations, a 10 percent weakening of the forint (to the euro) cuts the banking sector's liquidity by 430 billion to 450 billion forints ($2.20 billion)," he said.
Simor said government measures to cut the budget deficit next year contributed to a consolidation of the country's financial markets.
But the economy, one of Central Europe's laggards in economic growth, would need further measures to reduce its external debt and current account deficit.
"Cutting state spending in itself is not enough, we need reforms ... to prevent falling back in the region ... We need to reduce vulnerability," he said. (Reporting by Sandor Peto and Gergely Szakacs; editing by Stephen Nisbet)