* C.bank extends lending programme with up to 2 trillion forints
* Continues to provide funds to commercial banks for free
* Room for more interest rate cuts - Governor Matolcsy
* Cbanker Balog says 10-20 bp rate cut possible in Sept (Adds comments on forex loans, deputy governor, analyst)
By Gergely Szakacs and Sandor Peto
BUDAPEST, Sept 11 (Reuters) - Hungary’s central bank will pump up to 2 trillion forints into the weak economy to provide cheap loans to businesses and said it could cut interest rates further, betting on a continued inflow of capital into the country’s markets.
National Bank Governor Gyorgy Matolcsy, a close ally of Prime Minister Viktor Orban, who faces elections next year, said low inflation, Hungary’s improving fundamentals and global monetary loosening gave the bank room for more rate cuts.
The bank has been steadily cutting rates since August 2012 to a record low of 3.8 percent, supporting the government’s pro-growth policies. It also launched the first tranche of its funding for lending programme in April to boost the economy and has now decided to extend it until end of 2014.
Hungary’s currency and bonds have been propped up by big capital inflows into emerging markets over the past year and inflation was running at a 39-year low of 1.3 percent in August.
But analysts have warned that if the Federal Reserve decides on a tapering of its own stimulus in the U.S., that could result in a withdrawal of capital from emerging markets.
Matolcsy told a news conference on Wednesday that he believed loose monetary conditions in the world would prevail.
“There is a third factor (that underpins further easing),” he said. “This is what we had expected, but is now clear to everyone, that in the world of global central banks, loose monetary policy will not come to an end.”
His deputy Adam Balog told Reuters a further 10-20 basis point cut in late September was “on the cards”.
The Fed will meet next week when it is expected to announce a modest cutback in its bond-buying programme, but also say that the programme will continue well into 2014.
The forint, along with central Europe’s other currencies, has largely escaped a recent sharp weakening in other emerging currencies, thanks to the region’s close ties to a recovering euro zone and Hungary’s big current account surplus.
However, Eszter Gargyan at Citigroup said the Hungarian bank’s fresh stimulus and further rate cuts could increase Hungary’s vulnerability if global winds change.
“Easing monetary conditions driven by declining short-term rates and increased HUF liquidity, mixed with loosening fiscal policy stance in the run-up to elections, point towards a risk of the currency weakening if external market conditions deteriorate,” the economist Gargyan said.
The forint, which has been hovering around 300 to the euro in recent weeks, eased to 300.20 from 299.60 after the bank’s comments but quickly firmed back to 299.80.
Uncertainty over the government’s plans to provide further help to foreign currency mortgage holders has weighed on sentiment recently and the government’s recent ultimatum to banks added to these concerns.
Banks fear the new relief scheme could inflict further big losses on them if the government makes banks foot the bill.
They have said a conversion of the forex loans into forints could only happen with the central bank’s help as it could otherwise hit the forint currency badly.
The bank was waiting for the government’s proposal and could only support a scheme that would not jeopardise financial stability, Matolcsy said, adding the bank would not support a conversion of all forex loans in one go.
The bank would be ready to provide foreign currency from its reserves at market exchange rates for commercial banks - keeping in mind the strictest reserve requirements - if this was required by the government for a relief scheme, he said.
The central bank’s funding programme will be expanded by up to 2 trillion forints until the end of 2014, with the bank providing loans to commercial banks for free, Matolcsy said.
The bank expects its total 2.75 trillion forint lending programme to boost economic output by 1.8 to 2.4 percent overall. Matolcsy did not give a time frame but said its impact could be felt even in 2016.
Commercial banks would receive the funds for free and the maximum margin applicable on the new loans they issue to companies would remain at 2.5 percent, he said. The first leg of the programme would start in October with a 500 billion chunk.
“The central bank ... would essentially print money in a way that resembles the Bank of England’s Funding for Lending scheme,” said Adam Keszeg, an analyst at Raiffeisen.
Gargyan said the fresh stimulus could boost growth in the short term and help the government achieve its 2 percent growth target for next year. But it could have only limited impact on long-term growth. ($1 = 225.3044 Hungarian forints) (Writing by Krisztina Than; editing by Stephen Nisbet)