UPDATE 2-Colombia central bank raises interest rate 25 basis points

Fri May 30, 2014 4:43pm EDT

(Adds no foreign exchange measures adopted, fin min quote)

By Peter Murphy and Nelson Bocanegra

BOGOTA May 30 (Reuters) - Colombia's central bank board raised interest rates a further quarter percentage point on Friday, as expected, on top of the same increase last month, as policymakers seek to head off a rise in inflation as economic growth gathers momentum.

The increase in the benchmark lending rate to 3.75 percent was expected by the market, with 30 of 36 analysts surveyed in a Reuters poll this week forecasting the 25 basis point rise while others forecast it would hold rates steady this month at least.

The rise, which the board decided upon unanimously, took borrowing costs to their highest level since January 2013 and helped the peso strengthen to 1898.50 to the dollar during trade on Friday, its firmest since October 2013.

Economic growth has been gathering momentum for the last year and the central bank expects first-quarter expansion of 4.8 percent compared with 2.8 in the same three-month period a year ago. The government will publish the growth figure on June 19.

"The Colombian economy is going through a very good moment and it is totally normal and natural that the monetary policy would move to a more neutral position," rather than one that provided more stimulus, said Finance Minister Mauricio Cardenas.

Inflation is rising as a result but with spare productive capacity in the economy, it is still nearer the lower end of the central bank's 2-4 percent target range. Twelve-month price inflation by the end of April was 2.72 percent.

Cardenas said output should reach the economy's full potential and that nationwide unemployment could fall below 8 percent by the end of the year, from 9 percent in April.

Bank director Jose Dario Uribe said the board did not adopt any measures to influence the exchange rate but that it would buy dollars up to the full $1 billion limit it set for the April to end-June period.

The government was also using surplus cash to buy dollars, Cardenas said, to weaken the peso which has surged since J.P. Morgan announced in March it would increase the amount of Colombian sovereign debt in two of its indexes, a measure which takes effect from Friday.

"At this time, we want to prioritize building up dollar liquidity ... because this is a scenario in which the dollar price is favorable," Cardenas said.

A majority of analysts surveyed in the Reuters poll said the benchmark rate will rise to 4.25 percent to 4.5 percent by the end of this year, and between 5 percent and 5.25 percent by the close of 2015.

Colombia is in the middle of presidential elections but the outcome of a second round vote on June 15 is seen as innocuous for the economy. Both finalists, incumbent President Juan Manuel Santos and right-wing Oscar Ivan Zuluaga, are former finance ministers with a reputation for pro-business policies.

(Additional reporting by Julia Symmes Cobb; Editing by Andrew Hay, Richard Chang and Nick Zieminski)

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