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By Luiza Ilie
BUCHAREST, April 10 (Reuters) - Romania's annual inflation eased less than expected to 6.7 percent in March from February's 6.9 percent, as a weak leu currency continued to exert upward price pressures.
Data released on Friday by the National Statistics Board showed prices rose 0.5 percent on the month in March, with food costs rising 0.4 percent. Non-food items were up 0.7 percent, while services rose 0.3 percent.
The global crisis has weakened the leu currency this year, probably hurting domestic demand which was formerly a key driver of economic growth. The lower leu has put upward pressure on consumer prices by raising the cost of imports and of the price of many services which are denominated in euros.
Romania has some of the highest interest rates in the European Union, but its economy is also heading for recession as the crisis hammers manufacturing and ailing companies fire tens of thousands of workers.
The slow fall of inflation is clouding the outlook for interest rate cuts.
"Monetary policy decisions are complicated because you have recession on the one hand and high inflation on the other," said Nicolaie Alexandru-Chidesciuc, senior economist at ING Bank.
A surprise shock came from cigarette prices, rising a hefty 3.6 percent on the month following news that the government would bring forward a rise in excise duties.
"The figure is slightly above our forecasts, but confirms our expectations that in March disinflation would resume, therefore we maintain our estimations for a rate cut in May," said Volksbank's Melania Hancila.
"It seems that the reduction of consumption has impacted prices very little, as core inflation stays high, but I remain confident that it will show its effects in the coming months."
The mid-range of a Reuters poll of analysts earlier this week estimated annual inflation slowing to 6.5 percent in March. The central bank targets 2.5-4.5 percent inflation in December and its 2009 forecast stands at 4.5 percent.
Most central banks across the eastern part of the EU have cut interest rates aggressively since late last year, but this has pummelled currencies and forced them to slow the monetary relaxation.
Romania's central bank has cut rates by only a quarter percentage point to 10.0 percent and dealers have said it was also protecting the leu through covert interventions.
But with the leu stabilising in recent weeks, after Romania secured a 20 billion euro aid package from foreign lenders led by the International Monetary Fund, inflationary pressures are likely to soften, making room for interest rate cuts.
Following the data release, the leu firmed slightly, trading at 4.1151 per euro against Thursday's close of 4.1286, on a thin market due to the Easter holiday. (Additional reporting by Marius Zaharia; Editing by David Stamp)