* Halts rate cuts after govt plan to hike VAT, leu fall
* Concerns mounting about speed of recovery across region
* Says govt's fiscal measures mean prudent stance needed
* Poland c.bank also keeps rates on hold
* Decision in line with forecasts, leu unchanged
(Adds more details from cbank, Poland rates, updated leu)
By Radu Marinas and Luiza Ilie
BUCHAREST, June 30 (Reuters) - Romania's central bank held interest rates at 6.25 percent on Wednesday, halting its easing cycle after a government plan to raise value added tax added to uncertainty about the economy.
Concerns are mounting about the speed of recovery in emerging Europe and governments like Romania's are struggling to convince investors they can keep fiscal consolidation plans on track and prevent a debt crisis in the euro zone from spreading. Borrowing costs are at a record low following 400 basis points worth of easing since the start of last year. Most analysts had expected a further cut of 25 basis points before the VAT hike was announced last weekend but changed their minds as a result.
Poland also kept its main interest rate on hold, in line with market expectations, as inflation is easing and uncertainty over the pace of recovery remains high. [ID:nLDE65T1IZ]
Romania's leu
The central bank said higher VAT would immediately trigger a significant rise in consumer prices and it would act to limit the second-round effects of the measure and firmly anchor inflation expectations at low levels. [ID:nBUC003730]
"The risk related to the above-mentioned effects, together with persistent uncertainties surrounding the results of fiscal consolidation efforts as well as of those regarding the developments in the world economy, requires a continued prudent monetary policy stance," it said in a statement. The leu was almost unchanged after the interest rate decision and later statement and was trading 0.5 percent higher on the day at 4.366 per euro by 1300 GMT, pulling away from lows hit during the previous session.
"The decision is what was supposed to happen given political instability and the risks to the inflation outlook," said Nicolaie Alexandru-Chidesciuc, chief economist at ING Bank in Bucharest.
"Looking forward, I believe the central bank will wait to see to what extent the VAT hike reflects in prices and based on that we might see either rates on hold at the current level or even hikes."
IMF RELIEF
A cut in public wages, coupled with higher VAT, will help keep Romania's budget deficit under control and will probably ensure the IMF agrees to release the next tranche of economic aid when it meets on Friday, reassuring jittery markets.
But the austerity measures have worried investors as the VAT hike by five percentage points to 24 percent increases inflation risks and, coupled with a 25 percent cut in public sector wages, will likely dampen consumption and economic growth.
"This decision shows a careful positioning of the central bank given major uncertainties on the fiscal side related to the impact of recent moves including the value-added tax increase," said Ionut Dumitru, chief economist with Raiffeisen Bank in Bucharest.
"Our expectation is that inflation can now be heading towards 8-8.5 percent at the end of the year, also due to hikes in (household) heating prices and leu depreciation."
Inflation was running at 4.4 percent in May.
Finance Minister Sebastian Vladescu said on Tuesday he expected the economy to contract more this year than previously forecast, predicting a drop of between 1 and 2 percent in gross domestic product. (Additional reporting by Ioana Patran and Sam Cage; editing by Mike Peacock/Patrick Graham)