Oct. 23 (Bloomberg) -- Colombia’s central bank kept its benchmark interest rate unchanged at a record low and said it will inject liquidity into markets by buying dollars and bonds.

The seven-member board, led by bank chief Jose Dario Uribe, held the interbank rate at 4 percent after a surprise cut last month, matching the median estimate of 28 economists surveyed by Bloomberg. The bank will spend as much as 3 trillion pesos ($1.56 billion) to buy U.S. dollars and government peso bonds. The daily amount of dollar purchases wasn’t set.

Policy makers have slashed borrowing costs eight times in less than a year to encourage spending and said today there would be no need to raise rates in the “near future.” The plan to buy dollars and TES bonds may be designed to stem the peso’s 20 percent rally over the past six months, said Arnoldo Casas, head analyst at Bogota brokerage Cia. De Profesionales de Bolsa.

“Now that the central bank has announced it will intervene directly in the market, it should contain expectations of a stronger currency,” he said in an interview.

The bank will also inject liquidity into the markets ahead of December holidays through repurchase agreements of one, seven and 14 days. The government will reduce the amount of money it keeps on deposit in the central bank, Uribe told reporters today.

With the economy showing signs of recovery, the bank didn’t need to cut rates and risk fueling a surge of inflation next year, said Camilo Forero, senior analyst at Cia. de Profesionales de Bolsa.

“The bank is already seeing inflationary pressures in 2010,” Forero said.

2010 Inflation Target

The bank set its 2010 inflation target at 2 percent to 4 percent. Annual inflation fell to 3.2 percent in September from a high of 7.9 percent in October last year.

“The bank foresees that the inflation target fixed for 2010 will be met without pressure to increase the interest rate in the near future,” policy makers said in a statement.

Colombia’s economy fell into a recession this year for the first time since 1998. Uribe anticipates the rate cuts will bolster consumer demand, underpinning a second-half rebound in economic activity leading to zero growth this year and a 2.5 percent expansion in 2010.

Retail sales fell 0.9 percent in August from a year earlier, while industrial output declined 3.3 percent, the national statistics agency said Oct. 19. Stronger-than-forecast retail sales point to improving consumer demand, according to Alvise Marino, an analyst at IDEAglobal who covers emerging markets for the New York-based research company.

Peso Outlook

The peso dropped as much as 3.3 percent Oct. 20 on speculation the central bank would take measures to ease the currency’s rally. It fell 0.2 percent today, before the bank’s measures were announced, to 1917.95 per U.S. dollar.

Finance Minister Oscar Ivan Zuluaga last week said the government would suspend dollar sales in the market for the remainder of the year in a bid to ease peso gains.

The government also pledged to leave about $500 million in dividends from state oil company Ecopetrol overseas and sell peso bonds locally to compensate for that revenue.

A stronger currency makes Colombian exports more expensive, hurting the competitiveness of companies that depend on sales abroad.

Colombia policy makers in 2007 implemented controls on capital, forcing companies and investors taking loans abroad to deposit 40 percent of the funds in the central bank for six months to discourage bringing in short-term capital.

Zuluaga also imposed deposit requirements on stock and bond investments. Those controls were lifted last year.

Liquidity Measures

“We don’t think a rate cut would be effective for combating the appreciation of the peso,” said Alejandro Cuadrado, an economist at Banc of America Securities-Merrill Lynch Research in New York.

The bank usually boosts liquidity in the market ahead of December holidays to allow for the extra spending.

The bank expects inflation this year to fall below its target range of 4.5 percent to 5.5 percent. Uribe said today that he expects 2009 inflation to be close to 3 percent.

“With a gradual recovery in economic activity, the inflation tendency should bounce back in not too much time,” Cuadrado said. “The central bank should be looking to the long term.”

To contact the reporter on this story: Helen Murphy in Bogota at hmurphy1@bloomberg.net; Alexander Cuadros in Bogota at acuadros@bloomberg.net

Last Updated: October 23, 2009 19:35 EDT