(Adds debt tender, analyst comment)
* Central bank sees inflation picking up later this year
* Volatile capital flows an upside risk
* But investors may like Romanian rates
* Debt managers reject all bids at debt tender (Adds details, quotes)
By Luiza Ilie
BUCHAREST, Feb 6 (Reuters) - Romania’s central bank raised its inflation forecast for this year on Thursday and said the economy faced risks from volatile emerging market capital flows, although it said those risks could go both ways.
Like other emerging markets, Romanian assets have been hit since late January by jitters about an unwinding of U.S. stimulus. However, eastern Europe has been somewhat insulated due to relatively good fundamentals and close links with a recovering euro zone.
Romania’s central bank even cut interest rates on Tuesday, while some other emerging economies like Turkey and South Africa have had to raise rates to protect their currencies.
Central bank Governor Mugur Isarescu said on Thursday that while the turmoil in emerging markets posed risks, Romania offered relatively attractive interest rates and could also benefit if investors shifting money out of economies like Turkey and Ukraine - where political as well as economic problems have made investors nervous - chose to park money in Romania.
“It is the first time where we say external risks could go both ways,” Isarescu told a news conference to present the quarterly inflation report.
“We are a conservative central bank and we say the risk is rather that inflation will go up. But ... we are in the middle of potential crises, two of which have already been triggered in Ukraine and Turkey and we cannot rule out that while moving money here and there investors will discover interest rates in Romania are relatively good.”
The bank revised this year’s annual inflation expectation to 3.5 percent, the top end of its target range, from 3 percent and issued a 2015 forecast of 3.2 percent.
On Tuesday it cut its benchmark interest rate by a quarter point to a new record low of 3.5 percent.
The leu currency has been under pressure, however, and Isarescu said the bank had sold hard currency on behalf of the Finance Ministry last week. That helped boost the leu after a 2 percent slide against the euro since the start of this year.
Romania’s finance ministry rejected all bids on Thursday at a tender to sell treasury bonds with a residual maturity of 7 years, having already postponed a tender for short-term paper at the start of the week - probably because yield demands were too high although it did not say.
Isarescu said that debt managers now had plenty of leu funds at their disposal. The ministry is in a comfortable financing position. It has pre-financed some of its needs in the second half of 2013, tapped foreign markets in January and has a funding buffer that would cover five months.
“Funding conditions have deteriorated because of the emerging markets sell-off and tighter local liquidity and ... I wouldn’t be surprised if it happened again but they have a very large buffer,” said Mihai Patrulescu of Unicredit Tiriac Bank.
Annual inflation reached a record low of 1.6 percent on the year in December, and is expected to fall below 1 percent in the first months of 2014 before picking up again in the second half.
“Inflationary expectations will stay within target. That’s the biggest gain ... in the battle against inflation, that households and companies are getting used to low, European-level inflation rates in Romania,” Isarescu said.
Both Isarescu and Deputy Governor Cristian Popa have said the bank’s 3.5 percent interest rate left Romania “well-positioned” for some time to come, while suggesting monetary policy could be further eased by gradually lowering minimum reserve requirements for lenders’ liabilities. (Editing by Susan Fenton)