* Key base rate lowest since late June 2006
* Bank widens interest rate corridor to plus/minus 100 bps
* More cuts seen as recession bites, CPI pressure subdued
(Adds cbank comments, more analyst, detail)
By Balazs Koranyi and Marton Dunai
BUDAPEST, Nov 23 (Reuters) - Hungary's central bank cut its key interest rate to 6.5 percent on Monday and said more reductions could come if the financial situation and foreign investors' view of Hungary continues to improve.
"Hungary is facing a protracted recession, and consequently the inflationary pressure in the economy is practically nonexistent, what we do have can be tied to tax hikes," Governor Andras Simor told a news conference after the rate decision.
The economy contracted by 7.2 percent in the third quarter according to preliminary data earlier this month.
Simor said the half percentage point cut, which was fully in line with analysts' expectations, was backed by a convincing majority in the rate setting Monetary Council.
Rate cuts in Central Europe's main economies are seen almost over, but Hungary and neighbouring Romania -- where interest rates are the highest and the recession the deepest -- are expected to continue monetary easing.
The bank has cut its key interest rate by a total of 300 basis points in the past five months, taking rates to their lowest level since late June 2006.
The bank also cut its main inflation forecasts for 2009 and 2010, saying a deep recession keeps inflationary pressures subdued.
The bank now sees 2010 average inflation at 3.9 percent, down from 4.1 percent previously, and expects inflation to fall below 2 percent in 2011.
The bank also said on Monday that it widened the interest rate corridor determined by the overnight credit and deposit facilities to plus/minus 100 basis points from plus/minus 50 basis points previously, in order to boost interbank liquidity.
A stable forint currency, which has firmed by more than 18 percent from all-time lows versus the euro in March, and an expected fall in inflation next year has allowed the bank to gradually reduce its key rate in recent months.
An improvement in Hungary's risk assessment by investors has also increased the bank's room to ease policy, as the country is gradually comes off the International Monetary Fund and EU lifeline and returns to market financing.
DRAGGING RECESSION, SLOW RECOVERY
"In light of the weaker than expected Q3 GDP figure and inflation figures which have been persistently below forecasts, further monetary easing is clearly needed," said Daniel Bebesy, portfolio manager of Budapest Fund Management.
The bank has said it could undershoot its medium-term inflation target of three percent on the horizon influenced by monetary policy, as inflation is expected to come down next year after a rise this year on one-off government tax hikes.
"Continued subdued inflation despite the indirect tax increases is attributable mainly to the restraining effect of weak demand. In the Monetary Council's view, inflation may fall substantially below the 3 percent target over the medium term," the Council said in a statement.
"Interest rates may be reduced further if this does not threaten the inflation outlook and if shifts in perceptions of risks associated with the economy allow it," the Council said.
The median forecast of analysts in a Reuters poll showed another half percentage point cut to 6.0 percent in December and rates bottoming at 5.5 percent next year. (Writing by Krisztina Than, editing by Matthew Jones) ((krisztina.than@reuters.com; tel +36 309 865 969; rme krisztina.than@reuters.com.net))