By Luiza Ilie
BUCHAREST, Feb 5 (Reuters) - Romania's central bank kept interest rates flat at a record low for a seventh meeting on Tuesday, halted by worries over state finances and the currency from doing more to help an economy on the verge of recession.
Emerging European neighbours Poland, Hungary and the Czech Republic have all cut rates to stimulate their economies, which have been hurt by low demand in the euro zone, but Romania has kept rates flat since May 2012.
Speaking to reporters, central bank Governor Mugur Isarescu said data depicted an economy near stagnation last year. He forecast inflation would spike to 5-6 percent in the first half before falling to within the upper limit of the central bank's 1.5-3.5 percent target by year-end.
'Some people are asking why the central bank does not cut the interest rate faster to stimulate economic growth. If we lower the interest rate, wouldn't that discourage domestic savings ... as well as capital inflows?' Isarescu said.
Although the leu currency has recovered from record lows which initially prompted a halt to the central bank's easing cycle, inflation was 5 percent last year - well above its 2-4 percent target band.
Analysts say limited scope to cut rates this year when the economy is forecast to grow modestly, might prompt the central bank to inject more money at its open market operations to eventually support a drop in short-term rates.
'We see the central bank keeping (benchmark interest) rates unchanged this year,' said ING economist Vlad Muscalu. 'But given the pretty difficult economic situation, we believe that the central bank will have a liquidity policy that will ultimately lead to lower market rates.'
Isarescu said a prudent monetary stance coupled with improved investor perception of emerging economies are favourable for the leu, the best performing central European currency this year, having gained 1.5 percent versus the euro.
'The central bank has little room for a cut, (given) accelerating inflationary pressures,' said Georgiana Constantinescu of Credit Europe Bank in Bucharest.
Romania, the EU's second-poorest member, is still struggling to recover from two years of recession after a housing bubble burst in 2009, forcing it to seek help from the International Monetary Fund.
Growth was probably near zero in 2012 and all 15 analysts in a Reuters poll had expected interest rates to remain on hold at what is a record low for Romania but still among the highest official rates in the European Union.
Most see rates still at 5.25 percent at the end of 2013, although some expect cuts late in the year.
The leu has risen and borrowing costs fallen since Prime Minister Victor Ponta won a December election, but the currency remains within 5 percent of a record low and the country is trying to boost investor confidence with a new IMF deal.
Ponta will have to sell several state companies in the next few months if he wants to conclude a 5 billion euro agreement with the Fund that is needed to reassure foreign investors on fiscal policy.
Ponta still has to work with his rival, President Traian Basescu, and the possibility of any resurgence of their political row - which would undermine Romanian assets - is also limiting the central bank's room for manoeuvre.
(Writing by Sam Cage and Radu Marinas; Editing by Catherine Evans) Keywords: ROMANIA RATES/
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