* Hungary's programme, policies on track-IMF
* Improving fiscal sustainability remains key-IMF
* IMF says rate cuts should be gradual, cautious
(Adds more IMF comments, Aug budget data)
By Krisztina Than and Gergely Szakacs
BUDAPEST, Sept 7 (Reuters) - Hungary has met the terms of its IMF/EU loan and has reached agreement with the Fund to extend access to its existing loan package by six months until October 2010, Finance Minister Peter Oszko said on Monday.
The International Monetary Fund, which along with the EU and the World Bank lent Hungary $25.1 billion last October to avert financial meltdown, had completed its third review of the country's performance and said the programme remained on track.
It said the extension of the current financing package was aimed to cover Hungary's parliamentary election period in 2010.
Hungary is gradually trying to go back to financing its debt and deficit from the market and it successfully issued a Eurobond in July after more than a year of absence from international debt markets.
Oszko told Reuters earlier this month that the IMF/EU funds will serve as a safety buffer next year, but the aim was to return to market financing [ID:nNYS005373]
"Macroeconomic and financial policies in Hungary are on track," the IMF said in a statement on Monday.
James Morsink, head of the IMF delegation visiting Budapest, told a news conference that Hungary's 2010 budget, which still needs to be passed by the government and parliament, had certain risks but it contains adequate reserves to offset these risks.
Finance Minister Oszko told the same news conference that the government maintained its forecast for a 6.7 percent contraction in the economy this year and expects a further 0.9 percent decline next year.
Oszko said meeting the budget deficit targets this year and next year was key, especially considering the uncertainty still surrounding the economic outlook.
"Therefore we must make all efforts to ensure that the deficits comply with the targets," Oszko said.
Also on Monday data from the finance ministry showed that
Hungary posted a budget deficit
Oszko has said the government may need to freeze some reserves in the budget to meet this year's target of 3.9 percent of gross domestic product (GDP).
"The key objectives of the programme remain to improve fiscal sustainability and preserve the stability of the financial sector," the IMF said.
GRADUAL RATE CUTS
The IMF and Hungarian authorities agreed that Hungary, which has drawn on about 14 billion euros from the package so far, will draw upon 55 million euros following this latest review and will have access to the remainder of the financing in four equal tranches of about 800 million euros each.
"We ... reached staff-level agreement to extend the SBA (Stand-by Arrangement) by six months (to October 5, 2010) to cover the election period and the transition to a new government," the IMF said.
Hungary will hold general elections in April or May 2010 and the main opposition Fidesz party, which last ruled between 1998 and 2002, is expected to win the elections with a wide margin.
IMF's Morsink said the delegation met with MPs from Fidesz and former finance minister Mihaly Varga and they had no objections to the extension of the current stand-by agreement.
Morsink also said interest rate cuts carried out by the Hungarian central bank have been "appropriate" so far and said the bank should proceed with cautious, gradual rate cuts.
The bank has cut its key base rate by a cumulative 150 basis
points in July and August, to 8.0 percent