Colombia central bank likely to raise interest rate to 7.25 pct

BOGOTA, May 27 (Reuters) - Colombia’s central bank will likely raise its benchmark interest rate to 7.25 percent on Friday, the final increase in a nine-month tightening cycle meant to combat high inflation, as opinions begin to diverge on whether more hikes are needed.

The seven-member board will vote to raise the rate by 25 basis points, according to 14 out of 18 analysts in a poll by Reuters published late last week. The reminder predicted an increase of 50 basis points or a hold in the rate.

Analysts said the increase would help calm inflation, which is running at almost double the upper level of the central bank’s long-term 2 to 4 percent target range, and cool internal demand, which has fallen less than expected by the bank.

“We changed our call from pause to one more hike in this cycle. A hike this Friday would be associated with the staff’s inflation forecast and doubts about the policy rate that is consistent with inflation convergence,” Citibank said this week in a note to investors.

The central bank and analysts say inflation will begin to ease in the second half of the year after reaching close to 8 percent recently, and finish 2016 at just below 6 percent.

Should the 25-point estimate prove correct, it would mark the ninth consecutive month the central bank has increased the rate, accumulating 275 basis points in raises.

Though most analysts said a raise on Friday will mark the end of the recent tightening cycle, others did not rule out the possibility of sharper increases.

“The discussion regarding demand pressures (national spending over national income) and the objective of achieving the inflation target in 2017, led us to consider an additional 50 basis point increase in the monetary policy rate,” BBVA said in a note.

Other analysts said the bank may leave the rate unchanged in the face of weak economic data, including industrial output increases in March which fell to 1.4 percent from over 8 percent in previous months and March retail sales which fell 2.9 percent.

“The recent data on industrial production and retail sales came out a bit badly,” said Paula Garcia of AdCap brokerage. “They are indicators that show in some ways the effect the rate rises are beginning to have on the economy.”

Last month the board lowered its economic growth forecast for 2016 to between 1.5 and 3.2 percent, with 2.5 percent as most probable, down from its previous likely estimate of 2.7 percent.

Moody’s affirmed Colombia’s issuer and bond ratings at BAA2 on Thursday, maintaining its stable outlook on the country and easing downgrade worries. (Reporting by Nelson Bocenegra; Writing by Julia Symmes Cobb; Editing by Helen Murphy and Meredith Mazzilli)