* Inflation to spike to 6.5-7 percent by Dec on tax hikes
* Cbank holds rates on inflation, financial stability issues
* Cbank sees persistent deterioration in growth prospects
* Govt aims to revive growth by cutting burden on companies
By Gergely Szakacs and Sandor Peto
BUDAPEST, April 20 (Reuters) - Hungary's central bank left rates unchanged on Monday and flagged concerns over inflation after the government unveiled measures that will cut growth and boost price pressures over the short term.
The bank kept rates on hold at 9.5 percent, in line with market expectations and analysts said its cautious statement erased any hope it would restart easing any time soon because of the forint's weakness and impending tax hikes.
On Sunday, the government announced spending cuts worth 1,300 billion forints ($5.67 billion) over the next two years and massive consumption tax hikes to save the budget and allow it to ease the tax burden on the corporate sector.
The measures will boost inflation from a multi-year low of 2.9 percent in March to a peak of 6.5-7 percent in December, well above the central bank's 3 percent target, Finance Minister Peter Oszko said on Monday.
"The prospects of the Hungarian economy have also worsened through the significantly reduced activity of banks in both retail and corporate lending, and also by the planned government measures, even though they are needed in the long term," central bank Governor Andras Simor said.
The measures worsen an already bleak growth outlook for this year and the economy is seen shrinking by up to 6 percent this year as export markets suffer and domestic consumption implodes.
The surge in inflation -- due to the tax hike and the forint's recent weakness -- present the bank with a policy dilemma as deteriorating growth prospects on their own would warrant lower rates.
"The NBH ... statement is very carefully balanced, and despite acknowledging a further deterioration in the growth outlook both Governor Simor and the press release seem at pains to paint a picture of a central bank firmly on hold with rates, Unicredit Economist Martin Blum said.
SEEKS TO AVOID HIKE
But analysts said the bank also wants to avoid raising interest rates as the brand new government, which took over less than a week ago, is presenting a solid plan to reduce spending, cut taxes on corporations, keep its budget deficit in line with its target and maintain its IMF loan facilities.
Hungary last year became the first European Union member to seek IMF help and its $25.1 billion rescue package has kept the nation's finances afloat.
The IMF facility has been in danger recently as a bigger than expected recession eats deep into budget revenues and threatens the budget deficit goal of under 3 percent, which is a key condition of the IMF.
"Cutting payroll tax and other employers' contribution is positive," KBC economist Zsolt Papp said. "Also positive is the planned reduction of social security payments by the government.
"All these steps should improve Hungary's competitiveness," Papp added.
The government also said it was confident that its tax measures could have an immediate impact on retaining jobs, which could help lay the foundation for a rebound in growth.
"A decline in costs can rein in the decline in employment immediately," Oszko said. "That can exert its impact just as quickly as the VAT hike does."
(Writing by Balazs Koranyi; Editing by Victoria Main)