By Gergely Szakacs and Marton Dunai
BUDAPEST, July 23 (Reuters) - Hungary cut interest rates to a new low of 4 percent on Tuesday and said it could eventually reduce them by another percentage point.
But in a nod to global market volatility, the central bank said the next cuts to its main rate could be in smaller increments than a series of 25 basis point moves over the past year.
Governor Gyorgy Matolcsy, a long-standing associate of Prime Minister Viktor Orban, wants to get the economy growing robustly again, but the risk is that rates drop so far that investors pull out of Hungarian bonds and the forint currency.
Investors who have accepted Hungary's falling rates so far because they still offers strong returns, may change their view as the U.S. Federal Reserve prepares to shift its monetary policy, reducing the supply of money on world markets.
Analysts said Matolcsy's plan for cutting in smaller steps of perhaps 10 basis points (bps) would not change the big picture that the bank's Monetary Council (MPC) wanted to go as low with rates as markets allowed.
'For me this still points to the fact the MPC has no real framework they are working in, and are still cutting as much as they can get away with. The raising of 10 bp cuts is simply an extension of this to allow cuts under more delicate market conditions,' said Peter Attard Montalto at Nomura.
The forint eased slightly to 295.85 to the euro after Matolcsy announced his plans at a news conference, while bonds were largely unchanged.
A bigger test of investors' patience could come on Wednesday, when the government discusses a plan to intervene in foreign currency mortgages worth billions of euros in an effort to help struggling Hungarian borrowers.
Large numbers of Hungarians took out the home loans because they had lower interest rates than forint mortgages. Since then, exchange rate moves have made them much more expensive in forint terms, leading many people to fall behind in their repayments.
The plan, details of which are still unclear, is likely to be painful for the banks that issued the loans. Shares in Hungary's biggest lender, OTP Bank have plummeted on investors' anxiety about the plan, further fuelled by the bank's boss selling a big chunk of his shares.
Orban, who is seeking re-election next year, has a record of taking to task banks he believes have enjoyed excessive profits at the expense of borrowers, but he has not done this at a time of such fragility in emerging markets.
CUTS FOR GROWTH
In its 12th cut in a row, the Monetary Policy Council also lowered rates by 25 basis points on Tuesday.
Matolcsy said after the council met that further cuts were needed to deliver growth in Hungary, central Europe's most heavily indebted economy which is limping out of a recession.
'Considering all of these factors, mid-term inflation, financial stability and the real economy, the end of the rate cut cycle can be somewhere between 3 and 3-1/2 percent,' Matolcsy said.
Analysts in a Reuters poll last week forecast Hungary's base rate would bottom out at 3.75 percent.
Matolcsy has been the architect of unconventional policies in the past and again managed to surprise investors by saying that subsequent rate cuts could be in increments ranging from 25 basis points to 10 basis points 'or a little more or less.'
No other European central bank has cut interest rates in such small steps recently, although the Danish bank used this tactic in 2009.
The governor pledged a 'careful, conservative' rate policy, but stressed that strong economic growth was crucial.
'We cannot stop with the rate cut cycle because we are not done with our mandate. Our mandate is for Hungary to have the most investments in the region,' Matolcsy said.
The bank believes it has room to cut rates further as domestic growth is slow and inflation is firmly below its 3 percent target, running at an annual 1.9 percent in June.
Tuesday's news conference was the first time since Matolcsy took office in March that he had given public guidance about rate policy. Analysts said by doing this, he was adopting the kind of communications strategy long used by the likes of the European Central Bank and U.S. Federal Reserve.
(Writing by Krisztina Than; Editing by Christian Lowe and David Stamp) Keywords: HUNGARY RATES/
(email@example.com)(+36 1 327 4745)(Reuters Messaging: firstname.lastname@example.org)
Copyright Thomson Reuters 2013. All rights reserved.
The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.