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CEE ECONOMY-Hungary underperforms CEE peers, Q1 recession raises chance of rate cut

(Adds Poland GDP data and comment, background)

By Krisztina Than

BUDAPEST, May 16 (Reuters) - Hungary's economy stayed in technical recession in the first quarter, with GDP dropping 0.2% from the previous quarter, raising the chance that the central bank could start cutting Europe's highest interest rate this month.

Poland's economy, the region's biggest, meanwhile shrank 0.2% on the year in the first quarter, better than analysts' expectation for a 0.8% drop, and grew 3.9% from the previous quarter on a seasonally-adjusted basis, data showed.

«We were saved by the solid economic situation in services and exports,» Bank Pekao analysts wrote on Twitter.

Romania's economy also grew 2.3% on the year in the first quarter. On a quarterly basis, the economy advanced 0.1%. Slovak GDP also showed growth both in annual and quarterly terms, while the Czech economy exited technical recession in the first quarter, helped by strong trade data.

Central Europe's households have been squeezed by high inflation, driven largely by soaring food and energy prices, with Hungary's inflation running at 24% year-on-year in April - Europe's highest level.

However, inflation slowed slightly from 25.2% in March, putting the idea of policy easing on the table, as surging borrowing costs stifle the economy.

The National Bank of Hungary has been the first in central Europe to take tentative steps toward looser policy after hiking rates between 2021 and 2022 to multi-decade highs. Last month, it reduced the top of its interest rate corridor, a first step that could lead to a cut in its key 18% one-day deposit rate.

The bank has said it will be watching the risk environment in deciding on next moves, but analysts say the chance of a rate cut at the bank's May 23 meeting have increased, with inflation on a downward trajectory and the forint hovering near one-year highs versus the euro.

«The rate cut cycle will likely begin in May ... the central bank focuses on inflation and market stability, and these two factors allow a rate cut,» said Peter Virovacz, an analyst at ING in Budapest.

Hungary's economy shrank by an annual 0.9% in the first quarter based on preliminary unadjusted data, in line with analyst forecasts. On a quarterly basis, GDP dropped 0.2%.

The Ministry of Economic Development said in a statement it expected a strong recovery in the second half of the year with the economy growing by 1.5% over the whole of 2023. The central bank has previously faced pressure from Prime Minister Viktor Orban's government to cut the cost of credit because of its impact on the fragile economy. (Reporting by Krisztina Than, additional reporting by Karol Badohal Editing by Christina Fincher)

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