* Second rate hike since late November to defend CPI goal
* Inflation risks may require further increase-bank
* Hike also seen as part of battle with govt over policy
* Hungary cbank may be alone tightening in region for months
(Adds governor, analyst comments, background)
By Marton Dunai and Gergely Szakacs
BUDAPEST, Dec 20 (Reuters) - Hungary's central bank (NBH)
raised interest rates
The quarter percentage point increase brings the base rate to 5.75 percent
The NBH's main tool to fight inflation is trying to keep the forint strong by lifting interest rates. That may prove hard as Europe's debt crisis continues, given that Hungary has the highest debt and credit risk in Central Europe.
The bank highlighted the risk that an improving economy will generate above-target inflation in the next two years.
"The Monetary Council has decided to raise the base rate in light of inflation remaining persistently above the 3 percent target as well as the upside risks to inflation," the bank said in a statement after the decision.
"In the coming months, the Council will decide whether to raise interest rates after weighing up the balance of inflation risks," it added.
POLITICAL TENSION
NBH Governor Andras Simor told a news conference the inflation outlook warranted the rate rise, while he played down the bank's tensions with the centre-right Fidesz government which has called for lower interest rates.
The government has also cut the pay of rate setters and said after the November rate hike that it had been "unjustified."
Many analysts have seen the bank's tightening as part of a policy battle with the government whose unorthodox fiscal moves have contributed to higher inflation pressures and higher risk premia on Hungarian assets.
They also say the bank may be seeking to carry out tightening before March, when the mandates of four of its rate setters will expire -- and the government may pack the Monetary Council with its own "dovish" candidates.
Tensions between the bank and the government are expected to remain high in coming months.
"Hungarian assets will continue to carry a hefty risk premium well into 2011," said Neil Shearing of Capital Economics.
Hungary's credit default swap (CDS) spreads
Expectations for monetary tightening have lifted the forint
MORE TIGHTENING SEEN
Last month's surprise rise was the first by a central bank in the European Union's eastern wing since the 2008 global crisis, even though Hungary's economy has been slower to recover than Poland or the Czech Republic.
Analysts projected in a Reuters poll that the base rate would peak at 6 percent in early 2011 before heading downwards later next year [ID:nSLAGNE6KN].
The Polish and the Czech banks are set to keep rates on hold at record lows -- at 3.5 percent, and 0.75 percent, respectively -- at their meetings on Wednesday. [ID:nLDE6BF1KU]
Poland is unlikely to tighten rates until early next year and the Czechs until the second quarter of 2011. The central bank of Romania -- which still struggles to get out of recession -- is seen lowering its 6.25 percent main rate in 2011. [ID:nLDE6B60SR] (Reporting by Sandor Peto/Krisztina Than; editing by Patrick Graham)