December 21, 2018 / 2:28 PM / a year ago

UPDATE 1-Colombia's central bank likely to hold rate as it eyes external markets

(Adds minimum wage)

By Helen Murphy

BOGOTA, Dec 21 (Reuters) - Colombia’s central bank will likely hold its benchmark interest rate stable on Friday to give a final boost to the economy before it begins raising the rate next year to contain inflation and align with international monetary policy trends.

The seven-member policy board may leave borrowing costs at 4.25 percent, unchanged since last April. Analysts expect the bank to begin lifting in March and raise borrowing costs 75 basis points throughout the year.

The bank’s discussions will probably focus on newly approved tax reform and possible fallout from trouble in other emerging markets, even as Colombian inflation continues close to the bank’s 2 percent to 4 percent target and economic growth indicators show moderate signs of improvement.

“Stabilization of the inflation trend and expectations close to the central bank target are the main arguments to remain on hold,” Bancolombia said in a report to investors.

Still, inflation may be affected next year by an increase in food costs as an oncoming El Niño weather phenomenon is seen having an impact on harvests and energy prices. The government also announced a 6 percent increase in the monthly minimum wage, which could also stoke prices.

The central bank has an ideal 2019 inflation target of 3 percent, while annual consumer prices rose 3.27 percent in November.

Tax reform approved this week may have an adverse effect on consumers as duties on beer, soft drinks and banks hit spending and credit and new income taxes are levied on middle and high earners.

International market turbulence and lower oil prices are beginning to hit Colombia, with the peso currency falling as investors retreat from emerging markets and the U.S Federal Reserve raises interest rates, drawing investors away.

“Whilst the central bank decision should be straightforward there surely will be a lengthy chat about external events which have so impacted Colombian capital markets over recent months, be it the effect of the Federal Reserve on the bond market or the oil price and the peso - all factors outside of the policy committee’s control but which need to be to factored in,” said Rupert Stebbings, institutional equities advisor at Alianza Valores.

The bank has held the interest rate steady since April, after making cuts of 350 basis points from December 2016 in a bid to bolster economic recovery.

The bank expects Colombia’s gross domestic product to expand 2.7 percent this year and 3.35 percent next, after growing 1.8 percent in 2017. (Reporting by Helen Murphy; Editing by Jeffrey Benkoe and Jonathan Oatis)

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