Colombia cenbank seen holding interest rate to lift GDP, inflation

BOGOTA Fri Jan 31, 2014 7:30am EST

BOGOTA Jan 31 (Reuters) - Colombia's central bank is expected to hold its benchmark lending rate steady for a tenth month on Friday allowing Latin America's lowest interest rate to bolster economic growth and push up below-target inflation.

The seven-member policymaking board will maintain borrowing costs at 3.25 percent - a Reuters survey of 25 analysts found - and focus much of its discussion on emerging market currency turmoil and how the U.S. Federal Reserve's stimulus easing could affect Colombia.

Economists have expressed optimism that the effect of an easing cycle that shaved 200 basis points from the interest rate starting in 2012 is beginning to be seen in growth levels, making it likely the board will begin lifting rates as soon as March.

"The outcome of the meeting is clear; no change," said Munir Jalil, an economist at Bogota-based Citigroup.

"But the internal discussion will be a lot more interesting. They have a lot to talk about on the international front because Colombia is not an island to the problems in emerging markets."

Fears about the health of many major emerging economies have sent investors out of those markets, prompting many central banks to raise rates to contain the effects of the selloff.

Currencies tanked across emerging markets in anticipation of further withdrawal of U.S. monetary stimulus and signs that China's economy, the world's second largest, has come off the boil.

Colombia's peso has weakened 4.5 percent so far this year and 13.3 percent in the last 12 months.

Finance Minister Mauricio Cardenas - who represents the government at policy meetings - hinted this week that the board could opt to scrap its dollar purchase program put in place to weaken the currency - which in 2012 strengthened 9 percent.

The bank has been intervening in the exchange market for more than two years to stem gains in the peso and at the December board meeting extended its program to as much as $1 billion through the end of March.

FASTER 2014 GROWTH

Inflation that is below the bank's target range of 2 to 4 percent has given the board - led by Jose Dario Uribe - leeway to keep the interest rate at a growth-fuelling level. Consumer prices rose 1.94 percent in 2013 and are expected to nudge up 2.2 percent in the 12 months through January.

At 3.25 percent, Colombia's interest rate is the lowest in Latin America. Regional rates span from 4 percent in Peru to 10.5 percent in Brazil.

The economy grew a better-than-expected 5.1 percent in the third quarter against the previous year but the government revised down its second quarter number.

While the government has stuck to its official economic growth forecast of 4.5 percent for 2013, Cardenas indicated the expansion could have been less. In an interview with Reuters last week he suggested GDP growth could be between 4.3 percent and 4.5 percent for 2013.

This year he sees a 4.7 percent expansion.

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