Colombia raises rate to combat inflation***

BOGOTA, Apr 30 (Bloomberg): Colombia's central bank increased borrowing costs for a third month in a bid to head off inflationary pressure while also pledging to maintain efforts to restrain the peso's rally. The seven-member board increased the benchmark interest rate a quarter point to 3.75 per cent Friday, meeting expectations of 23 of 29 economists surveyed by Bloomberg. Six analysts forecast no change. The bank cited a higher 2011 growth forecast, higher home prices and expanding loan growth in raising the rate. This "suggests that the adjustment toward a less expansive monetary policy should continue," policy makers said in their statement that accompanied Saturday's decision. "The rate increases will help to maintain inflation within the target range this year and next and contribute to avoiding future financial imbalances." Speculation that policy makers would announce plans to extend or expand daily dollar purchases in a bid to curb the peso's 6.7 per cent rally in the past month -- the best performance against the dollar among 25 emerging market currencies tracked by Bloomberg -- prompted the peso to decline as much as 0.5 per cent earlier this week. Following the bank's announcement, Finance Minister Juan Carlos Echeverry said the government has pledged "to not bring in one single dollar from overseas" this year. The finance minister also said that the government has pledged to give the central bank the capacity to continue dollar purchases of "at least" $20 million beyond June 17 if necessary. The bank in February had extended the dollar purchase program it had initiated last September. Additionally, Colombia will buy up to $1.2 billion in the spot market this year to make payments that are due overseas, Echeverry said. "By refraining from monetizing dollars onshore the government is contributing to reduce the supply of U.S. dollars and through it alleviate the pressure on the dollar to weaken," Goldman Sachs Group Inc. economist Alberto Ramos said in an e-mailed report.