UPDATE 2-Hungary says may cut rates to as low as 3 percent
(Adds quotes, background)
* Hungary c.bank delivers 12th interest rate cut to 4 pct
* Cbank governor sees cycle ending at 3.0-3.5 pct
* He says next cuts could be in smaller increments
* More cuts will test market appetite for Hungary
BUDAPEST, July 23 (Reuters) - Hungary cut its main interest rate to a new low of 4 percent on Tuesday and said it could eventually lower rates by another percentage point, but in a nod to global market volatility it said the next cuts could be in smaller increments.
Central bank 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 go so low that investors pull out of bonds and the forint currency.
Investors who have accepted Hungary's falling rates to date because it still offers strong returns may rethink as the U.S. Federal Reserve prepares to shift its monetary policy, reducing the supply of money on world markets.
Analysts said Matolcsy's announcement of cutting in smaller steps would not change the big picture: that the central bank's Monetary Policy 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 10bp 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 the central bank announced his plans in a news conference, while bonds were largely unchanged.
The central bank cut rates by 25 basis points on Tuesday to bring the main rate to 4 percent, the twelfth cut in a row.
Matolcsy told a news conference after the rate-setting Council met that further cuts were needed to deliver growth.
"Considering all of these factors, the mid term inflation, financial stability and the real economy, the end of the rate cut cycle can be somewhere between 3 and 3 and a half percent," Matolcsy said.
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 in the past few years. One of the few precedents is Taiwan, which used to change its main rate by irregular increments.
Tuesday's news conference was the first time since he took office in March that Matolcsy 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.
The governor pledged a "careful, conservative" rate policy, but stressed that strong 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 economic growth is slow and inflation is firmly below its 3 percent target, running at an annual 1.9 percent in June.
The bank has lowered its base rate by 25 basis points every month for the past 12 months. It cut again on Tuesday despite wobbles in the past few weeks in the forint currency and steep falls in shares of the Hungary's biggest bank OTP.
This was caused by concerns that the government could take further radical steps to help hundreds of thousands of households which have foreign currency mortgages.
Previous measures, including a repayment scheme in 2011, forced Hungary's mostly foreign-owned banks into huge losses, and investors fear the new plans could hurt banks further. The government is due to discuss the plans on Wednesday.
Analysts in a Reuters poll last week forecast Hungary's base rate bottoming out at 3.75 percent, a quarter point below the level predicted a month ago, and some economists say rates could fall further still if markets remain benign.
(editing by Christian Lowe)