* Cbank cuts more than analysts' fcast for 50 bps cut
* Firmer forint, inflation outlook, markets allowed cut
* C/A balance also improved faster than expected
* More rate cuts may follow if CPI, markets allow-bank
(Recasts with cbanker's comments, detail, markets)
By Gergely Szakacs and Balazs Koranyi
BUDAPEST, July 27 (Reuters) - Hungary's central bank
surprised markets on Monday by slashing rates
The bank last cut rates by 50 basis points in January and has kept them on hold since then, citing risks that a renewed weakness of the forint currency could pose to financial stability.
In a Reuters poll last week, 20 out of 24 analysts projected a half percentage point cut in the bank's (NBH) key rate.
Governor Andras Simor told a news conference that Hungary's risk assessment had improved considerably over the past months which showed in a fall in CDS spreads and government bond yields, and also in a revival of the domestic bond market.
As a further positive sign of improving investor confidence, earlier this month Hungary sold a eurobond and boosted sales at its forint-denominated bond auctions [ID:nLG26256], cutting reliance on a $25.1 billion IMF-led package secured last year.
"We can cut rates further if inflation remains under target on our policy horizon and our risk assessment continues to improve," Simor said after the rate decision.
"This rate cut has been on the cards for months... The Council had been waiting...for the improvement to become lasting. It didn't only prove to be lasting but continued to improve and this allowed a bigger cut," he added.
The Council discussed three options -- a 100 bps cut, a 75 bps cut and a 50 bps cut -- and the final decision was taken in a close vote, Simor said.
With Monday's reduction the Hungarian bank joined central banks in the Czech Republic, Poland and Romania which have all cut rates in the past months to help their economies fight recession or stagnation amid the global economic crisis.
Hungary's economy is expected to contract by 6.7 percent this year mainly due to a fall in demand in key export markets.
"Given that the Hungarian economy is in deep recession there is no real inflationary pressure and since the Hungarian forint has firmed up significantly recently on an improved global financial environment, we think that made the NBH deliver the 100bp cut," said Lars Rasmussen at Danske Bank.
The forint
Government bond yields dropped by about 10 basis points on shorter papers and some 20 basis points at the long end after the rate cut as the market rallied, traders said.
GLOBAL SENTIMENT IS KEY
Both analysts and the International Monetary Fund have warned the central bank should be cautious with further easing as the current stability of the forint and markets was fragile and could be easily upset by a shift in global mood.
Simor also warned that investor sentiment could be fickle.
"An improvement in risk assessment is not a one-way street, there could be a turn... The situation in Latvia could impact the region's assessment," he said.
Crisis-hit Latvia said earlier on Monday it received a second tranche of EU aid worth 1.2 billion euros just as talks with its other main lender, the IMF stumbled after the largest party in the ruling coalition refused to sign an accord with the Fund for a delayed 200 million euro loan. [ID:nLR220274]
Hungary's central bank also said it expected inflation to be below its 3 percent medium-term target on the horizon relevant for monetary policy but inflation is expected to be high over the next year due to government tax hikes imposed on July 1.
Analysts said the bank was likely to ease policy further in the remainder of this year and next year but the pace of easing could be slow, and its impact on credit markets limited.
"A fragile banking sector and high levels of FX-denominated debt means that cuts in official rates are unlikely to do much ease credit conditions in the real economy," said Neil Shearing of Capital Economics.
"Accordingly, today's greater than expected rate cut does not change our view that the Hungarian economy is unlikely to recover from the current recession much before 2011." (Writing by Krisztina Than; editing by Andy Bruce/Toby Chopra)