UPDATE 1-Romania's central bank holds rates, expects higher inflation

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BUCHAREST, May 12 (Reuters) - Romania's central bank kept its benchmark interest rate on hold at 1.25% on Wednesday, choosing to wait before acting on worries about higher-than-expected inflation.

The bank has delivered four cuts worth 1.25 percentage point overall since March 2020, as well as cuts to minimum reserve requirements on commercial banks' hard currency liabilities and pledges to provide market liquidity as needed.

But with inflation expected to rise sharply, Governor Mugur Isarescu said in April policymakers saw no reason to further cut interest rates.

The bank, which is due to release on Friday new inflation forecasts for this year and next, "revised significantly upwards in the short term and to a smaller extent over the latter part of the projection horizon," it said in a statement.

"The annual inflation rate is expected to climb visibly above the upper bound of the ... target in the second half of 2021, under the stronger transitory impact of supply-side factors, including the steep rise in some commodity prices likely to accelerate inflation globally."

The bank sees inflation falling within its 1.5%-3.5% target in 2022. Its current forecasts are 3.4% and 2.7% this year and next, respectively.

Analysts polled by Reuters earlier this month expected Romania's central bank to hold fire on interest rates throughout 2021, although a majority see hikes before the end of next year.

Elsewhere in the region, most rate setters look set to weather a looming spike in inflation and let their economies rebound from the COVID-19 shutdown, propelled by strong domestic demand, investments and European Union funds.

The Romanian leu was flat against the euro. (Reporting by Luiza Ilie; Editing by Toby Chopra)