UPDATE 2-Colombia cenbank restarts dollar buying program

Fri Feb 3, 2012 9:13pm EST

* Central bank raised rate to 5 percent

* Investors seeking higher yields outside developed economies

By Helen Murphy and Jack Kimball

BOGOTA, Feb 3 (Reuters) - Colombia's central bank on Friday re-established buying at least $20 million daily for at least three straight months to help stem gains in the currency amid pressure from exporters.

Emerging market nations such as Colombia have faced a flood of cheap money in recent months as near-zero interest rates in developed markets prompt investors to seek higher yields, pushing up their currencies and strengthening their economies.

The peso has firmed almost 7 percent this year, making it one of the best performing currencies among the world's 36 most-traded, partly thanks to strong foreign direct investment inflows.

The dollar purchase program, which previously ran through September 2011, would re-start on Monday, the bank said in a statement.

Policy makers on Monday raised the benchmark lending rate a quarter point to 5 percent to slow inflation and cool bank lending, bringing complaints from exporters of flowers and bananas that the move would attract additional capital, boost the peso and damage their business.

"The rate hike is an invitation for speculative capital to come to the country in higher volumes, sharpening the revaluation process," the flower and banana growers industries said in a joint statement on Wednesday.

"Most worrying is that the measure to hike the interest rate has not even come accompanied by some exchange rate intervention given the space that exists to increase reserves."

Banana and flower exporters are among the biggest employers of rural Colombians and lead a lobby of exporters that have been the most vocal seeking a weaker currency after as many as 20,000 jobs in the flower industry have been lost in the last four years which they blame on the strong peso.

In a bid to stem the peso's rise, the government said on Monday it would not bring in dollars for financing in 2012 and would keep $1 billion in dividends from state oil company Ecopetrol, and another $1.2 billion in royalties, abroad.

The government has also said it would avoid imposing capital controls to prevent pressure on the currency and instead aim for long-term measures and micro-structural reforms.

Colombia has in the past used tools like lowering taxes to boost business competitiveness. Back in 2007 it established unpopular capital controls to deter speculative capital entering the market. They have since been lifted.

Almost $15 billion in foreign direct investment flowed into the Andean nation last year, mostly in the oil and mining sectors, as military blows against drug-funded insurgent groups made doing business easier and safer.

The bank's dollar purchases may head off further gains in the peso following the U.S. Federal Reserve's pledge last week to keep the benchmark U.S. rate low through 2014, sending investors to seek higher returns in countries like Colombia.

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