Colombia cenbank seen holding rate, eyes on dollar purchases

BOGOTA, March 21 Fri Mar 21, 2014 8:30am EDT

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BOGOTA, March 21 (Reuters) - Colombia's central bank is widely expected to leave its benchmark interest rate unchanged on Friday after strong GDP data this week showed low borrowing costs were helping the economy gain momentum without stirring still-low inflation.

What is less certain is whether the bank's policy board will extend a dollar purchase program designed to weaken Colombia's peso currency. Its seven members are likely to focus on the program given expectations of an imminent increase in foreign demand for Colombian bonds that could send the peso higher.

Policymakers should leave borrowing costs at 3.25 percent, according to all 28 analysts surveyed by Reuters earlier this week. Two analysts on Thursday said they had not changed their view for steady rates after better-than-expected 2013 growth.

The Andean nation's economy grew 4.3 percent in 2013, above the 4.1 percent analysts had predicted. Fourth quarter growth was 4.9 percent and above analysts' forecast of 4.8 percent.

"This figure is in line with the recovery that they had foreseen. I don't think it will imply a change in (monetary) policy or that they would raise the rate on Friday," said Catalina Tobon, head of economic research at Old Mutual.

Policymakers are expected to focus on the bank's dollar purchases given planned government reforms to help increase sales of its debt to non-nationals, efforts which are likely to boost demand for the peso. Colombia sells comparatively little of its debt to foreigners at around 7 percent.

J.P. Morgan this week increased the weighting of Colombian bonds in two of its indexes. Morgan Stanley said on Thursday that Colombia is likely to see $10 billion of inflows into local bond markets due to re-weightings in key emerging bond indexes.

Colombia's peso strengthened 0.79 percent versus the dollar on Thursday to 1,993, dipping below the 2,000 mark for the first time since January 24.

GROWTH UP, INFLATION STILL LOW

Colombia's inflation rate remains near the lower end of the central bank's 2-4 percent target range. It was 2.32 percent in the 12-month period through February, after hitting its lowest in five decades for calendar year 2013, at 1.94 percent.

The absence of inflation worries, based on spare production capacity or a negative output gap, has enabled the board to stoke economic growth free of concern that price growth would accelerate to a worrying level.

The bank shaved 200 basis points off the interest rate from July 2012 until March 2013 to help boost economic growth, and has held it steady since. The next rate increase could come as soon as May, analysts say, as inflation begins to creeps higher.

Colombia's economy started 2013 disappointingly, with growth of 2.6 percent in the first quarter then 3.9 percent in the second. Growth rose to 5.1 and 4.9 percent in the third and fourth quarters as the effects of monetary easing appeared to kick in. (Editing by Andrew Hay)

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