Colombia holds interest rate to drive growth, lift inflation

BOGOTA Fri Jan 31, 2014 2:48pm EST

BOGOTA (Reuters) - Colombia held its benchmark lending rate steady for a tenth month on Friday to allow Latin America's lowest borrowing costs to bolster economic growth and below-target inflation before a likely rate hike as early as March.

The seven-member policymaking board maintained borrowing costs at 3.25 percent in a unanimous decision that met the expectations of all 25 analysts polled by Reuters.

"That was a meeting without surprises and cements our view that there will be a gradual increase in rates starting in the second quarter, maybe April or May," said Daniel Lozano, chief economist at Bogota-based brokerage Serfinco.

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.

Colombia's economy is likely to grow between 3.3 and 5.3 percent in 2014, with 4.3 percent the most probable figure, the bank said. The board narrowed its 2013 growth estimate to between 3.7 and 4.3 percent from 3.5 to 4.5 percent in last month's meeting.

That compares with 4.2 percent in 2012 and 6.6 percent expansion in 2011.

"Interest rates remain at levels that stimulate aggregate spending and hopefully allow gross domestic product to approach the productive capacity of the economy in 2014 as inflation converges towards the 3 percent target," Colombia's central bank said in a statement accompanying its decision, adding that fourth quarter GDP growth may as much as 4.5 percent.

OVERSEAS CONCERNS

Much of the board's discussion focused on the international scenario and how it would impact liquidity and overseas financing.

Fears about the health of many major emerging economies have sent investors out of those markets, prompting 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.

"They have a lot to talk about on the international front because Colombia is not an island to the problems in emerging markets," said Munir Jalil, an economist at Bogota-based Citigroup.

Colombia's peso has weakened 4.5 percent so far this year and 13.3 percent in the last 12 months. the peso closed on Friday at 2,015.20 per dollar.

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.

"The actual exchange rate level is one we consider good news, we know it has an important impact on our farmers and industrialists so it gives us an enormous sense of relief," Finance Minister Mauricio Cardenas said after the bank's board meeting.

(Additional reporting by Nelson Bocanegra, Peter Murphy and Luis Jaime Acosta; editing by Andrew Hay)

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