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imageBOGOTA: Colombia's central bank is expected to hold the key interest rate steady for the first time in six months as policymakers judge the lending rate may be reaching a neutral level while the economy needs help to maintain growth.

A Reuters poll this week showed 29 of 36 analysts expect the policy board to keep the rate steady at 4.5 percent, the highest since October 2012, as it eases off a spate of monetary stimulus that stoked growth.

The bank began a tightening cycle in April, lifting the rate from 3.25 percent - where it had remained for 11 months - to stem any future inflationary pressures.

"It's highly probable the rate will be held, basically because the economy is slowing, and even while inflation is increasing, it's still more or less in line with recent bank expectations," said Alejandro Reyes, economist at brokerage Ultrabursatiles.

"There are clearly divisions on the board, but when the bank takes decisions that change policy they usually do it with unanimity to demonstrate institutionality," said Reyes, who has worked at the central bank and who expects a six-month pause.

Colombia's economy expanded less than expected in the second quarter, slowing to 4.3 percent from 4.5 percent a year earlier and shrinking compared with the first three months of the year.

The central bank has said it is nearing its full productive capacity.

A neutral interest rate is one that does not affect the economy, as it occurs when growth is at potential and inflation is on target.

Finance Minister Mauricio Cardenas has expressed some concern in recent weeks about Colombia's revenue stream as crude output begins to decline and an economy-driving oil boom wanes.

A fiscal gap, estimated at about 12.5 trillion pesos ($6.2 billion), opened as a result of a decline in inflows from the energy sector, prompting the government seek a tax hike to fund investment.

The central bank's dollar purchase program ends this month, and economists expect it to extend the plan, while reducing the amount to up to $1 billion through year-end from up to $2 billion through September.

The bank accumulates reserves to limit the impact of external shocks.

Colombia's inflation is forecast to end the year slightly higher than the mid-point of the 2- to 4-percent target range, a still-comfortable level, but above a near 50-year low of 1.94 percent in 2013.

The bank has said it does not see inflationary dangers in the coming months, an opinion that allows it to maintain the current interest rate.

Growth is likely to grow this year to around 5 percent, the bank has said, versus expansion of 4.7 percent in 2013.

First-quarter growth was 6.4 percent.

Some economists expect the level of acceleration to prompt the bank to raise the rate again.

"The output gap is closed and Colombian growth is still higher than its potential and that will put pressure on inflation," said Pedro Tuesta, a Latin America strategist for 4Cast Inc in Washington.

Copyright Reuters, 2014

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