UPDATE 2-Cautious Hungary slows pace of easing as it cuts rates again
* Cbank cuts base rate by 20 bps to 3.8 pct, deeper than expected
* Low inflation, weak growth still allow further cuts
* But Fed concerns, FX mortgage plan weigh on market sentiment
* Cbank calls for caution but sees room for more easing
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.
The rate cut, though, was bigger than analysts had forecast, indicating that the bank - packed with appointees of the ruling Fidesz party which faces elections next year - is still keen to ease policy if markets allow to shore up a stagnant economy.
Hungary and its central European peers have held up well during a recent selloff in emerging market assets but 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, and said that inflation and economic trends allowed further easing.
"However, in light of the significant reduction in interest rates so far, and taking into account developments in perceptions of the risks associated with the Hungarian economy, a slower pace of policy easing is warranted," the Monetary Council said in a statement.
It made no reference to when rates could bottom out, even though Governor Gyorgy Matolcsy, a close ally of Prime Minister Viktor Orban, indicated last month that rates could fall as low as 3.0 to 3.5 percent.
Investors are also eyeing talks between the government and banks about a new relief scheme to help foreign currency mortgage holders, after an earlier measure and high taxes caused deep losses for the country's mostly foreign-owned banks.
They are concerned that the new scheme could pose further losses on the bank sector. Eliminating the foreign currency risk on all these mortgages would, however, give the central bank more room to manoeuvre and would reduce the country's vulnerability to global market swings.
"We expect them to continue to push as much as possible as fast as possible to take rates down to around 3.00 percent - whether that's 25 bp, 20 bp or 2 bp will depend on market pricing it seems," said Peter Attard Montalto, an analyst at Nomura said.
"The risk, of course, is that if the emerging market risk cyclone lands on Hungary, especially given the FX mortgage conversion issue brewing."
The forint eased to 301.60 to the euro from 300.20 before the rate cut. Bond yields climbed 5 basis points.
Hungarian rates are still higher than those in regional peers: 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 to cut its benchmark rate further to 3.5 percent but some said after Tuesday's bigger-than-expected reduction that the rate could go to nearer 3 percent.
The forint is not under too much pressure for now. It has eased more than 3 percent against the euro this year, but less than most emerging currencies.
Like other central European assets it has been helped by a pickup in the euro zone economy, the region's biggest trading partner, and by Hungary's current account surplus while emerging peers like India, Turkey and Indonesia are struggling with high current account deficits.
Still, Hungary has a large external debt burden and the government has introduced unorthodox policies, including sudden tax increases, which make its markets vulnerable to swings in investor sentiment.
(Editing by Susan Fenton)