April 28, 2017 / 8:31 PM / in a year

UPDATE 1-Colombia central bank cuts rate more than expected, to 6.50 pct

(Adds comment, detail from bank statement)

By Nelson Bocanegra and Helen Murphy

BOGOTA, April 28 (Reuters) - Colombia’s central bank cut the key interest rate by a more-than-expected half-percentage-point at its meeting on Friday in a bid to bolster the sluggish economy as inflation begins to ease.

The board, with six instead of the usual seven members, reduced the lending rate to 6.5 percent, meeting expectations of just four of 21 analysts in a Reuters survey last week. The remaining 17 expected a quarter-point reduction.

The bank also reduced its 2017 economic growth forecast to 1.8 percent from 2 percent.

“Recent indicators of economic activity such as retail sales, industrial production and consumer confidence suggest a weakening of the economy in the first quarter of the year more pronounced than expected,” the bank said in a statement.

“The reduction of inflation was in line with that expected by the bank’s technical team, but its decrease was explained for the most part by the behavior of food prices... On the other hand, the greater deceleration reduces the projections of inflation in the policy horizon.”

The vote was split, with four board members calling for the 50-basis-point cut and two seeking a reduction of 25 basis points. Last month one member wanted the board to hold the rate steady to assure inflation is under control.

Policymakers hope that lowering borrowing costs will help Latin America’s fourth-largest economy pick up speed as factories trim output and Colombians hold back on purchases of big-ticket items.

“There are a couple of important things that have happened in recent days. There has been a sharp drop in market inflation expectations measured through public debt and economic activity,” said Camilo Perez, chief economist at Banco de Bogota, referring to weak industrial and retail data.

“This combination of indicators could require greater monetary expansion, although it should not be forgotten that inflation remains above target,” he said.

As inflation heads lower - from a high of almost 9 percent in July 2016 - board members have enough space to relax their position to as low as 5.75 percent this year and 5 percent in 2018, analysts say.

But despite the decrease, to an annual 4.69 percent in March, expectations for consumer price gains are still above the long-term target of 2 percent to 4 percent.

Bank chief Juan Jose Echavarria said inflation should come down close to 4 percent this year and to 3 percent next year. (Additional reporting by Julia Symmes Cobb, Carlos Vargas and Luis Jaime Acosta; Editing by Dan Grebler)

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