UPDATE 1-Hungary central bank slows pace of easing, cuts rates by 20 bps
* Cbank cuts base rate by 20 bps to 3.8 pct
* Low inflation, weak growth still allow further cuts
* But Fed concerns, FX mortgage plan weigh on market sentiment
* Investors eye central bank's statement due at 1300 GMT
BUDAPEST, Aug 27 (Reuters) - Hungary's central bank slowed the pace of monetary easing slightly on Tuesday, cutting interest rates by 20 basis points, as markets have turned volatile on concerns about reduced inflows to emerging markets.
While Hungary and its central European peers have held up well during a recent selloff in emerging market assets they are still vulnerable to capital withdrawals once the U.S. Federal Reserve starts to scale back its stimulus programme.
The National Bank of Hungary (NBH) cut its base rate to 3.8 percent, taking Hungarian borrowing costs to a new record low, after a series of 25 point reductions over the past year. Tuesday's rate cut was still bigger, however, than a Reuters poll forecast for a 10-point reduction.
"The fact that the central bank did slow the pace of the easing signals that they are aware of the uncertainty in the external market environment, reflected by a weaker forint and bond yields that won't decline," said David Nemeth at K&H Bank.
The forint eased to 301.60 to the euro at 1219 GMT, from 300.20 before the rate cut.
The bank under the leadership of former economy minister Gyorgy Matolcsy, a close ally of Prime Minister Viktor Orban, and packed with appointees of the ruling party on its Monetary Council, has been keen to cut interest rates to shore up the economy, which barely grew in the second quarter.
Orban's ruling Fidesz party faces elections next year and needs to show to voters that the economy is recovering from a recession last year.
While low inflation and a sluggish economic recovery warrant further easing, the bank warned after its last meeting in July that fragile conditions in financial markets could trigger "a change in the pace or extent of its rate cuts."
Hungarian rates are still higher than those of its neighbours: Poland cut rates to a record low of 2.5 percent in July while rates in the Czech Republic are virtually at zero.
Analysts expect Hungary's central bank to cut its benchmark rate further to 3.5 percent.
However, signals from the U.S. Federal Reserve that it could begin to reduce its monetary stimulus as soon as next month have hit other emerging markets hard and capital withdrawals could also complicate the task of Hungarian rate setters down the line.
Hungary's budget deficit is relatively low at an estimated 2.7 percent of GDP for this year and it runs a current account surplus, unlike emerging peers like India, Turkey and Indonesia which are struggling with high current account deficits.
The forint has eased more than 3 percent this year, but less than most emerging currencies.
A pickup in the euro zone economy has also supported central European assets as the currency bloc is central Europe's biggest trading partner.
Still, Hungary has a large external debt burden, and unorthodox government policies including sudden tax increases, which make its markets vulnerable to swings in investor sentiment.
Hungarian yields have tracked higher in past weeks, after hitting record lows earlier this year, and any sign that the central bank is ending rate cuts could drive them even higher.
Foreign investors hold some 5 trillion forints ($22 billion) in Hungary's domestic government bond market.
Investors are also closely eyeing talks between the government and commercial banks about a new relief scheme to help hundreds of thousands of foreign currency mortgage holders, after an earlier government measure and high taxes caused deep losses for the country's mostly foreign-owned banks.
Sentiment in markets turned sour on Tuesday as unease grew about the threat of a U.S.-led military strike against Syria.
(Editing by Susan Fenton)