Aug. 5 (Bloomberg) -- Colombia's central bank needs to restore its ``credibility'' by emphasizing that controlling inflation is the main objective of policy makers, Fitch Ratings said.

Inflation expectations have ``turned unfavorable partly due to the perception that monetary policy decisions have become increasingly guided by the central bank's growing concerns about the pace of (the peso's) appreciation and decelerating growth,'' analysts Erich Arispe and Shelly Shetty wrote in a report today.

Banco de la Republica's board has come under government pressure, led by President Alvaro Uribe, to halt rate increases as the peso's appreciation and slower growth jeopardize employment and erode exporter profits. In a bid to slow the 64 percent rally in the peso over the past five years, the central bank announced June 20 that it would buy $20 million daily in the currency market. On June 26, the central bank suspended the sale of dollar options, which seek to ease swings in the local currency, until after Aug. 8.

The central bank on July 25 raised its overnight lending rate a quarter-percentage point to 10 percent, the highest in almost seven years. Uribe criticized the move, saying Banco de la Republica should listen to ``the Colombian people who are worried about high interest rates.''

The increase in the overnight lending rate ``is an encouraging sign that the central bank is trying to reassert its independence,'' Arispe and Shetty wrote. ``Fitch will continue to monitor (the central bank's) policy response in the future to evaluate how the central bank prioritizes its inflation objectives over growth and a stronger currency.''

Inflation Accelerates

Colombia's annual inflation quickened to 7.5 percent in July, the highest since May 2003. Economists raised their median forecast for 2008 year-end inflation to 6.5 percent from 5.97 percent, according to a central bank survey released last month. That rate exceeds the central bank's 3.5 percent to 4.5 percent target range.

Fitch Ratings and Standard & Poor's rate Colombian foreign debt BB+, one level below investment grade. Moody's Investors Service also rates Colombia one notch below investment grade at Ba1.

``Further strengthening of the macroeconomic policy framework could benefit Colombia's credit quality,'' according to the Fitch report.

The yield on Colombia's benchmark 11 percent bonds due July 2020 fell 3 basis points to 11.9 percent, according to Colombia's stock exchange. The bonds' price rose 0.148 centavo to 94.386 centavos per peso after earlier rising to 94.919, the highest since June 9.

Colombia's peso fell 0.2 percent to 1,774.3 per dollar, from 1,771 yesterday, according to the Colombian foreign- exchange electronic transactions system, known as SET-FX.

To contact the reporter on this story: Andrea Jaramillo in Bogota at ajaramillo1@bloomberg.net

Last Updated: August 5, 2008 18:05 EDT