UPDATE 1-Colombia cbank needs to keep with expansion -board member

Thu Feb 28, 2013 9:37am EST

* Colombian economy continues to show weakness

* Central bank board member worried about low inflation

By Nelson Bocanegra

BOGOTA, Feb 28 (Reuters) - Colombia's central bank needs to continue its expansive monetary policy for "a good while" and is able to do so because of low inflation and weakness in the economy, Carlos Gustavo Cano, one of the monetary authority's seven board members, said on Thursday.

Colombian policymakers have slashed the benchmark interest rate by 150 basis points since mid-2012 to its current 3.75 percent, the lowest in the region, as they battle against weakening manufacturing data and overseas sales.

"Actually yes, there is a space to continue an expansive posture," Cano, considered the most expansionist on the bank's board, told local Javierana radio.

"Not only is there room for a further expansionist stance but there is, in my opinion, the need to continue with that position and for a good while."

A spate of feeble economic data, from industrial production and retail sales to exports and civil works, have added pressure on the central bank to cut its overnight lending rate to spur growth and help stem gains in the peso currency.

It has repeatedly lowered its estimate for 2012 economic growth, currently expecting 3.6 percent, slowing from 5.9 percent growth in 2011.

The bank is already worried about economic growth this year.

At its unanimous rate vote on Feb. 22, the bank said expansion in the first quarter this year would take a hit from a drop in coal exports, fewer working days during the period, and lower demand for Colombian goods from Venezuela.

Policymakers see growth in gross domestic product at between 2.5 percent and 4.5 percent this year.

Monetary policy decisions usually take between 12 months to 18 months to pass through to the local economy.

"We have to look, not any longer at 2013, that (song) is already sung, but at how the world will be in 2014 and act with monetary policy so we obtain the effects in 2014," Cano said.

Inflation has stayed well within the bank's target range of 2 percent to 4 percent, hitting the bottom end in January and possibly dipping below the goal in February, according to a Reuters poll.

If consumer prices decline too much, however, Colombians may hold off on purchases on expectations that goods will become less expensive, causing the economy to stall further.

"Deviations from the target are worrying, whether they are above or below it as it is now. It's worrying to the extent that this deviation is combined with a deviation also in GDP growth relative to its potential," Cano said.

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