(Adds central bank governor, analysts, markets)
* Hungary central bank surprises market with 50 bps rate cut
* Bank slashes CPI, GDP forecasts, to undershoot CPI target
* Also cuts banks' mandatory reserve requirement
* Forint, OTP Bank stock surge after cbank move
By Balazs Koranyi and Gergely Szakacs
BUDAPEST, Nov 24 (Reuters) - Hungary's central bank
unexpectedly cut interest rates <HUINT=ECI> by 50 basis points
to 11 percent on Monday, citing an improved inflation outlook
and fewer risks to the economy after a $25 billion IMF-led
bailout.
The bank, which hiked interest rates last month by 300 basis
points in an emergency move to shore up the falling forint
currency, also flagged the possibility of further monetary
easing provided that financial stability improves further.
"The agreement with the International Monetary Fund (IMF)
and the planned budget adjustment measures have reduced the
risks to the financing of the country's external debt, which has
increased the room of manoeuvre of monetary policy," the rate
setting Monetary Council said in a statement.
"There will be room for further cuts if risks around the
continuity in capital flows and the stability of the financial
system continue to moderate," it added.
The bank also reduced commercial banks' mandatory reserve
requirement to 2 percent from 5 percent from December which,
along with the rate cut, sent the stock of the country's biggest
lender OTP Bank<OTPB.BU> up by 14 percent by 1428 GMT.
The forint surged 1.5 percent to 260.20 to the euro.
In a Reuters poll <HUREPO1> last week 21 of 22 analysts
forecast the bank would hold fire after a month of financial
turmoil which forced it to seek the $25.1 billion bailout.
This was the first rate meeting since the 300 basis point
hike and Governor Andras Simor said the bank now expected to
undershoot its medium-term inflation target of 3 percent.
"This allows the bank to loosen monetary conditions," Simor
told a news conference.
He said the Council discussed three options -- a 50 basis
point cut, holding rates and a 100 basis point cut -- and there
was a strong majority for the half percentage point cut.
Earlier this month Slovakia cut its main two-week repo rate
by 50 basis points to 3.25 percent, and the Czech central bank
slashed rates by 75 basis points to 2.75 percent.
The Polish central bank is expected to hold fire later this
week although some market players are now factoring in a cut.
Central eastern Europe faces a sharp slowdown and Hungary's
economy is expected to slide into recession next year as demand
falls in western Europe, their key export market.
FALLING INFLATION, GROWTH
The central bank also released its fresh quarterly inflation
report on Monday in which it sharply reduced its inflation
forecasts for both next year and 2010, and also slashed its
economic growth forecasts. []
The bank cut the 2009 average inflation projection to
3.1-3.4 percent from a previous forecast of 4.1 percent
published in August, while it reduced the 2010 inflation
projection to below 2 percent from 3 percent.
"Today's monetary easing measures are based on markedly
lower growth and inflation forecasts....In short, the central
bank now expects to meet its inflation target in 2010, one year
earlier than in its August forecast," said Zsolt Papp at KBC.
The bank now also expects the country to face recession next
year, with the economy contracting by 0.2-1.7 percent.
"We are facing a new inflation path and the growth outlook
has also declined," Simor said. "The external growth outlook has
significantly deteriorated and parallel to that, investors'
willingness to take risks and liquidity has declined."
Analysts said further easing was conditional upon further
improvement in Hungary's assessment by foreign investors.
"The timing and scale of further policy easing will depend
on Hungary's financial stability and changes in the risk
premium," Citigroup said. It expected rates to be cut by at
least an additional 250 basis points by the end of next year.
(Writing by Krisztina Than, editing by Patrick Graham)
