Colombia’s central bank is expected to keep its benchmark interest rate on hold at its monetary policy meeting Friday as the bank keeps its focus on maintaining slow price increases.

The central bank’s key interest rate will stay at 3%, six of the seven economists polled by Dow Jones Newswires forecast. One analyst said that the central bank will slash the benchmark rate by 50 basis points.

An interest-rate cut could help the central bank fight the appreciation of the peso, which has surged nearly 12% this year. “Cutting interest rates could be very effective right now” as authorities struggle with the peso’s strength, said Carlos Ramos, an economist with brokerage firm Interbolsa SA, who predicts a rate cut.

Other economists, however, believe that the central bank is likely to take other measures to contain the peso’s rise, such as capital controls on short-term borrowing abroad by local firms. The monetary authority could also announce it will increase its dollar purchases from the current $20 million daily to drain more U.S. currency from the exchange market.

“The central bank could start buying as much as $40 million daily,” said Daniel Velandia, an analyst with local brokerage Correval SA.

Bank of America Merrill Lynch said it believes the central bank will keep the rate unchanged, but that the bank’s next move could be a rate cut. The low inflation rates and peso’s appreciation, as well as the gap between its benchmark rate and those in developed economies, could push the bank to slash rates again, Bank of America Merrill Lynch said in the report.

The central bank’s main concern remains price increases, which this year have stayed within the lower range of its 2% to 4% target. Consumer prices in September declined 0.14% as a result of drops in food prices. Inflation over the 12 months through September was 2.28%.

The slow price increases are taking place despite faster economic activity. After emerging from a slowdown last year, the Colombian economy picked up speed and grew 4.5% in the second quarter. Finance Minister Juan Carlos Echeverry has said that the gross domestic product could expand 5% this year.

The faster economic growth, however, could have an impact on inflation in the coming months and next year, said Velandia. “The central bank is looking at the inflation outlook for next year and it’s not clear that inflation will remain slow,” he said. “Inflation is always the bank’s priority,” he added.

(Darcy Crowe, Dow Jones)

Colombia’s central bank is expected to keep steady its benchmark interest rate at its monetary policy meeting Friday as faster economic growth hasn’t yet spawned inflationary pressures.

The central bank’s key interest rate will remain 3%, all seven economic analysts surveyed by Dow Jones Newswires said. Most say the bank will stand pat until late this year or early next year.

“Inflation is under control so the expansive monetary policy will continue,” said Carlos Ramos, an economic analyst with Interbolsa SA, Colombia’s largest brokerage.

The economy is expected to pick up this year after growing a tepid 0.4% in 2009. Finance Minister Juan Carlos Echeverry has said that he expects the economy to expand 5% in 2010. Gross domestic product grew 4.4% in the first quarter from a year earlier and the national statistics institute is expected to release second quarter data Thursday.

A separate survey produced a median estimate of 5.5% in GDP growth for the second quarter.

But the healthier economic activity hasn’t generated higher inflation, which remains within the central bank’s target range of 2% to 4%. In the 12 months through August, inflation was 2.24% in large part because of slow increases in food prices, which account for 28% of the consumer price index basket.

“We don’t see inflationary pressures,” said Juan Pablo Ayala, an analyst with brokerage firm Acciones y Valores. Most analysts agree that the central bank will likely keep in place the 3% rate until late this year or early 2011. “There’s room for expansive monetary policy until at least the end of this year,” Ayala said.

The central bank surprised the market by lowering its key rate by 0.5 percentage point in April to the current 3%, which is a record low for Colombia.

Central bank comments on the exchange rate will be closely watched. The bank last week started buying a minimum of $20 million daily, which it said it will do for at least four months, in a bid to rein in the peso. The currency has strengthened 13% so far this year.

The $20 million minimum the central bank is buying is unlikely to keep the peso weak, said Felipe Melo, a currency analyst with Alianza Valores. “More measures will be needed,” he said. (Darcy Crowe / Dow Jones Newswires)