Oct. 24 (Bloomberg) -- Colombia's central bank kept interest rates unchanged today in a bid to head off a resurgence of inflation running near the fastest pace since 2001.

The bank's seven-member board, led by chief Jose Dario Uribe, held the interbank rate at a seven-year high of 10 percent, meeting the forecasts of 33 of 36 economists surveyed by Bloomberg. Three economists predicted a quarter-point cut.

``The bank is focused on reining in inflation before it can relax interest rates,'' Alvaro Camaro, an analyst at Stanford Financial Group's unit in Bogota.

The central bank has paused since a quarter-point increase in July as policy makers sought to assess the effect of 16 rate increases in a little more than two years. Surging consumer demand in Colombia helped drive the $172 billion economy to its fastest expansion in decades last year.

Policy makers have increased borrowing costs by 4 percentage points since April 2006 to rein in inflation that's held above the bank's 3.5-to-4.5 percent target range for more than a year.

Consumer prices in the 12 months through September rose 7.57 percent, nearly twice the bank's target pace, down from the seven-year high of 7.87 percent reached in August.

Slowing

At the same time, the highest overnight lending rate since 2001 has succeeded in cooling the expansion of the economy.

Bank chief Uribe this month reduced his estimate for economic growth in 2009 to 4 percent from a previous projection of 5 percent. Colombia's economy expanded 3.7 percent in the second quarter, its slowest pace since 2005.

Gross domestic product grew 3.7 percent in the second quarter, the slowest pace since 2005 and down from 8 percent in the same period a year ago.

Output fell 8.8 percent in August from the year-earlier period, compared with the median estimate of a 0.5 percent increase in a Bloomberg survey.

Retail sales fell 0.7 percent in August, the government said this week, beating all forecasts in a Bloomberg survey of 9 economists whose median estimate was a 3.4 percent increase.

Alberto Bernal, emerging markets strategist for Bulltick Capital Markets, said the macro-economic conditions are in place for a 200 basis point reduction in interest rates next year.

``We're going into such a deflationary environment it's not even funny,'' he said in a telephone interview from Miami.

If Colombia had cut rates, it would've been the first Latin American country to do so this year. It also would've satisfied President Alvaro Uribe and major businesses who have complained restrictively high borrowing costs are putting jobs at risk.

``I hope the Holy Spirit enlightens the members of the Banco Republica,'' Uribe said yesterday in Bogota while inaugurating Chilean retailer Cencosud SA's first store in Colombia.

To contact the reporters on this story: Joshua Goodman in Rio de Janeiro jgoodman19@bloomberg.net

Last Updated: October 24, 2008 16:33 EDT