* Broader economy would benefit from weaker EUR/HUF -Szasz
* Says interest rate rises not necessarily effective
* Policy makers in a deadlock due to FX borrowing
BUDAPEST, Feb 25 (Reuters) - Unbridled foreign currency borrowing by households had hamstrung Hungarian monetary policy by curbing its impact on money supply and forcing the central bank into maintaining a stable forint, a top regulator said. Hungarians ran up trillions of forints worth of foreign currency debt during the boom years, mainly in the volatile Swiss franc, to take advantage of lower interest rates but now many struggle with repayments due to the franc's strength.
Karoly Szasz, head of financial markets regulator PSZAF said on Friday that the proliferation of these loans had rendered monetary policy ineffective as the central bank had to focus on maintaining the stability of the Hungarian forint.
"The stock of foreign currency loans has grown to such a scale that it has nearly rendered monetary policy, and economic policy unmanageable," Szasz told a European Union budgetary affairs conference in Budapest.
The centre-right government, which took office in May, had since banned foreign currency lending and is working on a solution to help underwater mortgage holders.
Most Swiss franc denominated loans were taken out at around
150-160 forints per franc
"With a foreign currency loan stock of this size, changing forint interest rates does not necessarily reach the objective intended by the Monetary Council (of the central bank)," Szasz said.
"An increase in the interest rate will not necessarily reduce money supply if, by way of foreign currency loans, additional funds are channelled into the economy, which can then be converted into forints," he said.
Szasz said higher forint interest rates did not necessarily restrict credit demand either, as they had no impact on demand for foreign currency debt.
That put Hungarian policy makers in a deadlock, as even though the broader economy would benefit from a weaker forint, such levels would be disastrous for household borrowers.
"A weaker forint/euro exchange rate could stimulate Hungarian exports, increase our competitiveness and boost employment and would therefore be desirable from the aspect of the economy," Szasz said.
"On the other hand, taking the magnitude of foreign currency loans into account, as well as the negative impact of a weaker forint exchange rate on the burden of foreign currency borrowers, this is simply unmanageable."
The central bank left interest rates on hold at 6 percent
(Reporting by Gergely Szakacs; Editing by Ron Askew)