UPDATE 1-Hungary govt expects lower borrowing costs as cenbank starts policy reversal

(Adds government comments, background) BUDAPEST, April 20 (Reuters) - Hungary's government said on Thursday that the central bank's plan to narrow the interest rate corridor next week was a favourable sign as it pointed towards lower borrowing costs that could help the economy. Prime Minister Viktor Orban's chief of staff Gergely Gulyas told a news conference that lending had practically stopped as borrowing costs were so high right now. The National Bank of Hungary (NBH) has the European Union's highest base interest rate, at 13%, with annual headline inflation still running at above 25% in March.

Hungary's central bank could cut its 25% top collateralised loan rate next week as part of a "multi-step process" towards policy normalisation, its deputy governor Barnabas Virag said on Wednesday, with his comments driving the forint lower by 2%. "Shaping monetary policy is clearly the task of the central bank but we welcome the intention expressed by the deputy governor that the Monetary Council could decide on lowering the top end of the interest rate corridor at its meeting next week," Gulyas said.

"This is the first favourable sign that could point towards a reduction of borrowing costs."

Gulyas said the government expected a breakthrough in the slowdown of inflation in July-August. He also said the government had decided to extend price caps, including on foodstuffs, until the end of June.

Orban's government has put pressure on the central bank to start lowering borrowing costs to help a recovery.

Central bank Governor Gyorgy Matolcsy and Finance Minister Mihaly Varga held talks last week about ways to wrestle down inflation and reduce borrowing costs.
(Reporting by Krisztina Than and Boldizsar Gyori Editing by Gareth Jones)