Touch screen unresponsive when keyboard is slided out

So that is my problem, when I slide out keyboard, touch screen or buttons under it (home, back, etc). Become unresponsive, screen works great no distortions of any way in screen and as soon as I slide keyboard back in it becomes responsive with any issues.

Could it be that some kind of flat/flex cable needs replacement?

Also... if for example I click on icon and then slide keyboard in. It will react on the click. Like keyboard is blocking the the touch input.

Another thing, I was tinkering with input settings and once I made them work both, but when I rebooted phone I'm stuck with the same problem.

UPDATE: I just did a factory reset, problem persists so it might have been coincidence that it started working after my tinkering.

So... please advise me on both software and hardware solutions for this problem.

It uses Android 4.1.2, not rooted, but thinking of doing it.