UPDATE 2-Colombia holds key interest rate for 3rd month

Mon May 28, 2012 2:50pm EDT

Related Topics

* Inflation decelerating, consumer credit a concern

* Colombia expects peso volatility to continue

* Decision was unanimous (Adds details, quotes from finance minister)

By Eduardo Garcia and Nelson Bocanegra

BOGOTA, May 28 (Reuters) - Colombia's central bank on Monday held its benchmark interest rate steady for a third straight month as slower inflation and economic woes in the euro zone eased concerns about inflationary pressures.

The board's decision to keep the overnight lending rate at 5.25 percent was unanimous.

"Recent developments in Europe increased the risks of a strong recession on that continent," the central bank said in a statement. That "adds uncertainty to the growth forecasts in Colombia."

Still, Colombia's economy is on track to grow 5 percent this year as forecast, Finance Minister Juan Carlos Echeverry told reporters after the rate decision.

Consumer price inflation has slowed in recent months despite an increase in bank lending and concerns that households are borrowing too heavily

The bank said that although inflation forecasts have increased slightly, policymakers consider the risks of accelerating prices are moderate.

Consumer prices rose 0.14 percent in April, on top of a 0.12 percent gain in March, taking annual inflation to 3.43 percent

Analysts expect that year-end inflation will ease toward the mid-range of the central bank's target of between 2 percent and 4 percent.

"In general we feel that the central bank is calmed, with the economy growing within its potential and inflation within target," said Patricia González, an analyst with Banco de Bogota. "This stability in the lending rate could continue for the rest of the year."

Increased inflation since February 2011 led the bank to engage in a year-long cycle of interest rate hikes, but many analysts now say board members are unlikely to raise borrowing costs again this year.

Policymakers no longer seem as worried about price increases but have in recent months warned that household borrowing is growing at a much faster pace than income.

Car sales are at a record high, buoyed by ads that offer vehicles for as little as $50 a month with no down payment. Department stores offer discounts to shoppers that use credit cards, and banks cold-call clients offering pre-approved loans.

Colombia earlier this month, adopted additional reserve requirements on new consumer credit in a bid to improve bank portfolios as past due loans continue to increase.

The central bank said consumer credit growth is slowing, although it warned that households are still borrowing heavily.

"In the second half we'll see some turbulence coming from Europe and that should lead to moderation from families and companies," Echeverry said.

The central bank did not announce measures to contain the peso rally, which has strengthened 5.3 percent against the U.S. dollar so far this year. The peso gains have slowed in recent weeks after reaching 9.7 percent in early May.

Echeverry said he expects volatility in the exchange rate to continue in the coming months.

"What the exchange rate is reflecting in the past few weeks is the international uncertainty, that's why it'll be very difficult to forecast the exchange rate by the end of the year, because it will likely fluctuate widely," he said.

The bank's decision on Monday matched a forecast in a Reuters poll last week, in which all but one of 27 economists surveyed said they expected policymakers not to raise the benchmark interest rate. (Writing by Eduardo Garcia; Editing by Helen Murphy)

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