* Cenbank paused cycle of interest rate cuts in April
* Gov't betting on improved GDP growth
* Bank may extend dollar purchases
By Helen Murphy and Eduardo Garcia
BOGOTA, May 31 Colombia's central bank is likely to hold its key interest rate on Friday for a second straight month as the country's economic growth outlook improves on a government stimulus package, already-low borrowing costs and an improved overseas scenario.
In a Reuters poll on Monday all 22 analysts expected policymakers to maintain borrowing costs at 3.25 percent. It was the first such poll in 12 months in which all economists predicted the same monetary policy move.
The question mark for investors will be if the bank votes to extend its dollar purchase program, for how long and at what daily level.
Colombia has cut its key lending rate by 200 basis points since July last year to counter weak international demand for commodity exports and a slowdown in domestic demand in the $330 billion economy. In March the bank accelerated cuts, slashing 50 basis points to the current level.
"Doubts remain in Europe, but there are expectations for an improved U.S. economy," said Munir Jalil, economist at Bogota-based Citigroup. "So on the international front, there is light at the end of the tunnel for Colombia's economy."
The Andean economy grew more slowly in the first quarter of this year against the same period a year ago but is expected to speed up in the second quarter, the bank has said of GDP data due in June. Last year, economic growth eased to 4 percent, much lower than the 6.6 percent expansion in 2011.
Economists reckon the government's recent measures to stoke economic growth, which include accelerated state spending in infrastructure and aid to the construction sector, will prove effective and reduce the need for any more cuts this year.
The government measures are aimed at bringing economic growth back up to potential of 4.8 percent, though most economists, including those at the central bank, expect growth of around 4.3 percent this year.
"Consumer and investor confidence surveys in the past two months have shot upwards, that's the threshold to a much more dynamic economic activity. Therefore it's working," President Juan Manuel Santos said on Thursday, referring to the stimulus package.
The government is fighting to boost industrial production, which has fallen in the last five months as factories struggle with a strong peso that pits them against cheaper imports and increased labor costs.
Manufacturing slumped 11.5 percent in March, the sharpest year-on-year drop since mid 2009. The drop could be due to the earlier-than-usual Easter holiday, prompting fewer working days than usual.
The currency has strengthened steadily over the last decade - with a respite in 2008 - from about 2,800 pesos per dollar at the end of 2003, prompting heavy lobbying by exporters and industrialists. Last year alone it gained 9 percent, but a potent dose of intervention, both verbal and actual, has brought it down about 7 percent this year.
The currency closed on Thursday at 1,891 per dollar.
The bank buys at least $30 million daily on the spot market in a program that ends on Friday. Of the 22 economists polled by Reuters, seven see the board extending the program through August, while three expect an extension until September and six until the end of the year.
The remaining analysts predict the bank will halt the program as monetary policy in the United States shows signs of being less active in the foreign exchange market.
"The big question is what the bank decides to do with the dollar purchasing program; if the rate decision is announced late, it will be because they are debating that," said Jalil.
Finance Minister Mauricio Cardenas last week said he planned to ask the central bank's board members to extend the program until year-end.
In the last few days the currency has also moved closer to the government's "neutral range" of between 1,900 and 1,950 pesos per dollar.
"Cardenas has been very transparent about what he wants the board to do. The kite has soared recently, now we need to see how much more wind he wants to put under it," said Jalil.