* Adopting the euro desirable - c.bank chief Simor
* Crisis has cut potential growth, budget/tax reform needed
(Adds more detail, comments)
BUDAPEST, May 19 (Reuters) - Hungary should join the euro zone "in the foreseeable future" but adoption must be rooted in sustainable economic policies and growth, the central bank said on Wednesday.
"Overall, at present we believe that the adoption of the euro is at least as desirable from the aspect of the Hungarian economy as it was prior to the crisis," the bank said in a report on convergence.
"The stability of the economy as well as external and fiscal sustainability will have to be demonstrated well before the adoption of the euro, even for joining ERM-2."
Hungary has no euro adoption target date at the moment and meets none of the Maastricht criteria of euro zone membership. Analysts expect Hungary to adopt the euro in 2015.
"With regard to timing, we think that setting a credible target date for the adoption of the euro may take place based on stable fundamentals, especially on clear results attained in the fields of price stability and fiscal discipline," the bank said.
Central bank Governor Andras Simor told a news conference after the release of the report that the crisis has reduced the country's potential GDP growth rate to 2.5 percent from 3.2 percent prior to the crisis, under the bank's baseline scenario.
Under a worse scenario, the potential growth rate could be even lower at 2.1 percent, requiring Hungary to continue reforms by cutting taxes on labour, enhancing labour supply and maintaining disciplined fiscal policies to boost economic growth and make it sustainable.
LARGER DEFICIT CUTS NEEDED
A lesson of the crisis was that the country should cut its budget deficit even below levels required for euro zone entry so as to create room for fiscal policy to tackle crisis situations, the bank said.
"This crisis has only shown that for a country like ours, the introduction of the euro has become more desirable rather than less desirable," Simor added.
But it is very difficult to see now how fast potential growth will be in the coming years, where the interest rate level will be and the real exchange rate at which it will be reasonable to join the euro zone, he said.
The bank said in the report that Hungary should address the structural weaknesses of the budget and reform the expenditure side, in addition to maintaining fiscal balance.
It also said that lowering the general tax level can only be achieved by reducing government redistribution.
Sustainable economic and budget policy is all the more necessary as there are growing signs that in the future European union institutions will very closely monitor whether a country has met the Maastricht convergence criteria, the bank said.
The bank reiterated that it expected to meet its 3 percent medium-term inflation target next year.
"Maintaining the low inflation environment, however, poses another challenge to monetary policy," it said.
"If expectations become unanchored, there is a significant risk that inflation will increase as the economic recovery gathers pace."
Annual headline inflation was running at 5.7 percent in April. The bank's key base rate is at an all-time low of 5.25 percent and analysts expect more easing to come. (Reporting by Krisztina Than and Sandor Peto; editing by Stephen Nisbet)