Dec. 16 (Bloomberg) -- Colombia's peso climbed to the highest in more than two years on expectations the central bank will keep its benchmark interest rate at 6.75 percent at its monetary-policy meeting tomorrow.

Higher interest rates can increase the attractiveness of Colombian assets and boost demand for the local currency. President Alvaro Uribe signed legislation two days ago requiring foreign investors to keep their money in the country for at least a year. The measure is part of the government's effort to stem the peso's 18 percent surge this year.

``The locals have the perception that the central bank has no other means of stopping the appreciation'' of the peso, said Jaime Valdivia, director of research at Emerging Sovereign Group in New York. ``It will not end unless the government is serious about lowering rates.''

The peso advanced 0.9 percent to 2,364.50 per dollar at 11:19 a.m. in New York, the highest since June 2002. Out of 60 currencies tracked by Bloomberg, the peso is the second-best performer this year, behind the Polish zloty.

Colombia's policy makers will probably leave the interest- rate target unchanged at their monthly meeting, according to all 13 economists surveyed by Bloomberg.

``I don't think tomorrow they'll lower interest rates --they need time to see if the capital controls will work,'' Valdivia said. ``But I think the tightening cycle in Latin America is nearing an end.''

Odds of Rate Increase

Yesterday's decision to impose capital controls raises the probability of a future rate increase by Colombian policy makers, said Mohamed El-Erian, who manages $17 billion in emerging market debt at Pacific Asset Management Co. in Newport Beach, Calif. ``The latter measure affords the authorities somewhat greater control over monetary policy in the short run,'' El-Erian said in an e-mail message.

The limit on investments of less than one year may not limit the peso's appreciation because much of the gain has come from longer-term foreign direct investment, said Peter Frank, senior currency strategist at ABN Amro Holding NV in Chicago.

``A lot of capital is going into Colombia to build hospitals, hotels and shopping centers,'' Frank said. ``At the end of the day, the government is going to have to say, `We are a victim of our own success.'''

The incoming central bank managing director, Jose Dario Uribe, said Dec. 13 that the bank may buy more dollars next year. The bank bought more than $2 billion of the U.S. currency this year in a bid to build up foreign reserves and weaken the peso.

Brazil

Brazil's central bank raised its target rate 0.5 percentage point to 17.75 percent yesterday. The U.S. Federal Reserve boosted its overnight rate to 2.25 percent the day before, a 0.25 percentage point increase.

The Brazilian real declined 0.3 percent to 2.7342 after rising 1.5 percent yesterday, its biggest jump since August.

``Brazil offers the best value in emerging markets,'' El- Erian said in an interview. ``And it is converging very quickly with the more advanced economies, good policies and a very large financial cushion.''

Mexico's peso fell for the first day in three, declining 0.4 percent to 11.2211 per dollar. Chile's peso also dropped for the first day this week, falling 0.7 percent to 578.90.

To contact the reporter on this story: Jennifer Coogan in New York at Jcoogan4@bloomberg.net

Last Updated: December 16, 2004 11:25 EST