* Key base rate on hold for 4th month running, as expected
* Cbank raises 2011, 2012 CPI forecasts, warns of risks
* Says may need to hike if CPI, risk assessment worsens
* Forint falls nearly 1 percent vs euro
(Adds detail, markets, analyst)
By Gergely Szakacs and Sandor Peto
BUDAPEST, Aug 23 (Reuters) - Hungary's central bank kept its key base rate on hold at 5.25 percent on Monday as expected, but warned it may need to hike rates if the country's inflation outlook or risk assessment deteriorates.
The bank, which has kept its main rate steady at a record low for the fourth consecutive month now, lowered its average inflation projection for this year -- but raised its forecasts by half a percentage point for both next year and 2012.
The bank warned of upside inflation risks -- saying risks of overshooting its 3 percent inflation target have increased -- while also saying Hungary's economic recovery will be slower than previously expected next year, due to depressed domestic demand.
Its comments signalled heightened caution as the bank is watching risk premia on Hungarian assets and the forint after a surprise halt of a review of Hungary's loan review by the International Monetary Fund and the EU last month.
"If inflation risks persist or Hungary's risk assessment deteriorates in a sustained way, these could necessitate an interest rate hike," Governor Andras Simor told a news conference after the monthly rate meeting.
The bank discussed three different proposals at its meeting on Monday: a 25 basis point hike, a 25 basis point cut and keeping rates on hold, Simor said.
"Talk of a rate hike will surprise many. Indeed, we still see limited inflationary pressures in the economy thus far - given the weak recovery," said Timothy Ash at RBS.
The central bank sees average inflation declining to 3.5 percent next year and 3.4 percent in 2012, compared with its previous forecasts for 3.0 and 2.9 percent respectively.
Simor said the Monetary Council faced a dilemma on the inflation front, as inflation slowed in July due to a VAT hike impact disappearing from the base figure, but the bank's fresh inflation report showed rising inflation risks.
"Weighted with risks, a higher inflation trajectory is unfolding," Simor said.
The Monetary Council said in its statement that the risk that the inflation target will not be met has increased but it added that inflation may still return to close to the 3 percent inflation target due to weak domestic demand.
Year-on-year inflation slowed to 4.0 percent in July from 5.3 percent in June.
All the 21 analysts in a Reuters poll last week projected that the bank would keep its base rate on hold at 5.25 percent .
The forint was initially little changed after the rate decision but it later fell to 283.05 to the euro, down close to 1 percent from 280.35 prior to the rate decision. Dealers said the forint reacted megatively to Simor's comment on faster inflation and slower growth which were negative for the economy.
RISKS STAYING
Poland's central bank will also hold a rate-setting meeting on Tuesday and is expected to keep its main interest rate unchanged at an all-time low of 3.5 percent, but several analysts say a rate hike may come late this year.
The Hungarian bank last cut its main rate by 25 basis points in April, and has kept it on hold since then.
It said on Monday that global risk appetite has increased in the past months, which improved the risk assessment and demand for central eastern European assets.
"However, Hungary's risk premium has not fallen significantly. The Government's commitment to maintaining a sustainable path for the fiscal budget is key to preserving investor confidence," the Council said.
The forint has regained ground after its July falls and Hungarian government debt auctions have also gone well despite uncertainty over the 2011 budget. This uncertainty is seen prevailing until after municipal elections in October.
Hungary's new centre-right Fidesz government is not expected to lay out its economic and fiscal plans ahead of the vote which it wants to win by a big margin, analysts said.
"Everybody is waiting for the government's 2011 budget plans -- the National Bank will probably articulate a firmer view after that in October-November," said Gyorgy Barcza at K&H Bank.
(Writing by Krisztina Than; Editing by Stephen Nisbet)