April 26 (Bloomberg) -- Colombia’s central bank has room to keep the benchmark interest rate unchanged as the economy expands below its potential and inflation remains at a record low, Finance Minister Oscar Ivan Zuluaga said.

“The outlook for stability in monetary policy is bright,” Zuluaga, 51, said in an interview in Washington, where he’s attending the International Monetary Fund’s spring meeting. “The economy has the potential to expand 4 percent to 4.5 percent a year” without fueling inflation, he added, without saying how long the rate should remain on hold.

South America’s fourth-biggest economy may expand 2.5 percent in 2010, according to government forecasts, after emerging from its first recession in a decade. The IMF forecasts a similar rate, while Bank of America Merrill Lynch and Morgan Stanley see faster growth, at 3.4 percent and 4.1 percent respectively. The economy expanded 0.4 percent in 2009.

Zuluaga and the bank’s six other board members are forecast to keep the benchmark interest rate at a record low 3.5 percent for a fifth straight month when they meet April 30, according to all 10 estimates compiled by Bloomberg. Tame inflation has allowed policy makers to focus on cementing a recovery as Colombians head to the polls next month to replace President Alvaro Uribe, who has helped spur record foreign investment.

Annual inflation in March slowed for the second straight month to 1.84 percent, the lowest rate in more than five decades. The government targets inflation of 2 percent to 4 percent a year.

Bond Swap

The yield on the country’s benchmark 11 percent bonds due July 2020 was unchanged at 8.275 percent, according to Colombia’s stock exchange. The bond’s price was little changed at 118.264 centavos per peso.

The peso strengthened to 1,947.80 per dollar from 1,951.05 per dollar on April 23. The peso has gained 4.9 percent this year, the fourth-best performance against the dollar among 26 emerging market currencies tracked by Bloomberg.

Zuluaga, who will stand down when the new president takes office in August, said a peso-denominated international bond sale and the domestic bond swap conducted in April show Colombia’s “capacity to use all tools” to manage its debt. The government has sufficient financing until year-end, he said.

Colombia last week swapped 3.5 trillion pesos ($1.8 billion) of bonds due between 2010 and 2015 to extend maturities and close the biggest budget deficit in five years. The country on April 7 sold about $800 million in peso-denominated bonds on the international market.

‘Clearest Sign’

“This is a very important deal, as it means total risk to the investor, in the sense he is taking the risk for a country’s currency,” said Zuluaga, who has a degree in economics from Bogota’s Javeriana University. “It is the clearest sign of the market’s perception, the confidence in a country and the strength of its fundamentals.”

Colombia “paved the way” for other Latin American countries to issue local currency-denominated debt, Zuluaga said.

Chile announced on April 23 it plans its first global bond sale in pesos, of about $500 million, as part of an effort to raise $1.5 billion needed to repair damage from February’s earthquake that killed more than 400 people.

“One of the regions that won with the crisis was, without a doubt, Latin America,” Zuluaga said. The region “is showing progress, in particular a group of countries that share the same economic policy guidelines.”

Investment Grade

Zuluaga, who was president of steel company Acerias de Colombia SA for a decade until 2001, said that he regrets he won’t be in office to see Colombia obtain an investment grade rating.

“The country needs to continue to fight,” Zuluaga said, referring to the investment-grade rating. “It will certainly take us more time to achieve it, but we will achieve it, sooner than later. Colombia today is a very attractive country, with substantial progress,” he added.

Colombia’s foreign debt is rated BB+, or one level below investment grade, by Standard & Poor’s. Chile and Brazil are the only two South American countries rated investment grade.

Colombians vote May 30 to replace Uribe, who attracted $50 billion in foreign investment since taking office in 2002 and helped spur record growth. In the same period, the benchmark IGBC stock index has risen more than 10-fold, while the peso strengthened 37 percent against the dollar.

The country rose to 37th among 183 countries in the World Bank’s 2010 “Ease of Doing Business” index, the highest ranking among all Latin American and Caribbean countries except St. Lucia. In 2009, it was ranked 49th.

Election Outlook

Former Bogota mayor Antanas Mockus has surged into a statistical tie with former Defense Minister Juan Manuel Santos in the race to succeed Uribe.

Mockus would win the election in a second-round runoff scheduled for June 20 with 50 percent of the vote compared with 44 percent for Santos, according to a survey of 1,000 people by Centro Nacional de Consultoria published April 22.

Zuluaga, who was a senator from 2002 to 2006, said he hopes that whoever wins doesn’t make major changes to Uribe’s economic policy.

“The country today is headed in the right direction,” he said. “What’s left is to make improvements.”