The Hungarian central bank is on course to reduce the pace of its monetary easing cycle, despite weak inflation and sluggish growth, to guard the currency against the increasing risk of a sell-off, Capital Economics Emerging Markets Economist William Jackson said.

Capital Economics, however, forecasts that the central bank might reduce its benchmark interest rate to 3.5 percent by the year-end.

With the economy having significant spare capacity, Hungarian authorities may also introduce additional measures, including the conversion of foreign exchange mortgages into forint, to tackle the country's spiraling external debt problem, the economist noted.

But, conversion of foreign exchange mortgages might expose the country to any deterioration in the external financing environment, and particularly a re-escalation of tensions within the euro-zone.

At the same time, lowering interest rates substantially below the 4-percent level runs a real risk of triggering a weaker forint, which is already facing risks from falling capital inflows, Jackson cautioned.

The central bank on Tuesday lowered its policy rate by a bigger-than expected 20 basis points to 3.8 percent, marking the thirteenth consecutive cut.

According to the economist, while enacting the rate-cut the monetary policy committee might have considered the fact that the forint has come through the recent Emerging Market sell-off relatively unscathed.

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