* Rate cut in line with analysts' expectation
* More easing possible if markets, outlook supportive
* Romanian cbank seen cutting, Poland seen holding rates
(Recasts with central bank comments, detail)
By Balazs Koranyi and Gergely Szakacs
BUDAPEST, Sept 28 (Reuters) - Hungary's central bank trimmed
its key interest rate further on Monday, by 50 basis points to
7.5 percent
The bank cut rates for the third month running as it expects inflation to fall below its 3 percent medium-term target next year and Hungary's currency and government bonds have firmed, helped by an improvement in the country's risk assessment.
"We can report cautiously optimistic news: global risk assessment has improved a bit further, Hungary's assessment has stabilised and this allowed a further rate cut," Governor Andras Simor told a news conference after the rate decision.
But he also added a word of caution.
"However, we continue to see our risk assessment extremely fragile, therefore we do not want to give a long term interest rate forecast, we are taking it on a month by month basis, and we will make decisions accordingly."
The central bank resumed policy easing in July after a long pause as Hungary, which had to resort to IMF/EU financial help last year, gradually tries to wean itself off international aid and return to market financing.
Monday's cut was in line with analysts' expectation in a
Reuters poll last week
Hungary's economy is expected to shrink 6.7 percent this year and the government's spending cuts, which are needed to keep the budget deficit in check and a programme agreed with the International Monetary Fund (IMF) on track, are seen deepening the economic slump as domestic demand has plunged.
"In case market conditions remain supportive and Hungary's risk assessment does not deteriorate, further cuts will be possible this year, taking the benchmark rate down to 7 percent or perhaps even below that level," said Gyorgy Barta, analyst at CIB Bank in Budapest.
Neighbouring Romania's central bank is also expected to reduce key rates further on Tuesday, by 50 basis points to 8.0 percent in a bid to revive lending and consumption amid a similarly painful recession there. [ID:nL8336631]
Poland, however, which is forecast to post modest positive GDP growth this year in contrast to most of its regional peers, is expected to keep its key rate on hold at 3.5 percent this week. [ID:nLB85085].
PACE OF RATE CUTS SEEN KEY
The Hungarian bank has cut interest rates by a cumulative 200 basis points in July, August and September, as it expects falling domestic demand to help inflation drop below its 3 percent target by next year from 5.0 percent in August.
Hungary's external balance has also improved markedly and its public finances stabilised with the budget deficit expected at 3.9 percent of GDP this year, and slightly lower next year.
The bank welcomed the positive developments but noted that there was uncertainty over the longer-term sustainability of certain non-structural spending cuts in the budget.
Analysts said the key question was how far the central bank can go cutting interest rates further without posing a risk to financial stability.
"We would disagree with a fast track of rate cuts (we expect only a 50bp cut till year-end and another 100bp cut in the whole of 2010)," said Zoltan Torok, analyst at Raiffeisen.
"The market is swiftly pricing out the risk premium on Hungarian assets, too fast in our view. Expectations are overshooting," he added.
(Writing by Krisztina Than; Editing by Victoria Main and Toby Chopra)