Banco de la Republica Colombia, which has cut rates four times since July to boost sagging economic growth, said fourth quarter data indicate that "growth for the full year could be less than 4 percent" but this forecast rests on a rise in investment in construction and civil works.
Last month the central bank said it was likely that Colombia's economy would grow 4.3 percent this year, with forecasts ranging from 3.7-4.9 percent.
Colombia's economy expanded by 5.9 percent in 2011 and was forecast by the International Monetary Fund in October to grow by 4.3 percent this year. But in the third quarter, Colombia's Gross Domestic Product contracted by 0.7 percent from the second for annual growth of 2.1 percent - the slowest since 2008 and below the central bank's forecast of 3.3-4.8 percent - down from a rate of 4.9 percent in the second quarter.
"By 2013 it is expected that some of the factors that have slowed investment in 2012 will be reversed, driving domestic demand," the central bank said, referring to investment projects in mining and energy that have been delayed. Investment in road construction should also pick up.
In addition, the central bank also said it expects global growth to improve slightly in 2013 with relatively stable terms of trade and abundant international liquidity.
"Under these conditions, we expect better economic growth in 2013 than we expect for this year," the central bank said.
The unexpected economic contraction in the third quarter was due to a slowdown in domestic demand to an annual growth rate of 2.4 percent from 7.1 percent in the second quarter due to a "sharp and unexpected contraction in investment, particularly in the civil works and buildings," the central bank said in a statement.
Exports have also been slowing, reflecting the global slowdown, while private and public consumption were a little better than expected in the third quarter, the bank added.
Inflation was also lower than expected in November, the bank said, adding that it expects inflation to remain below it's 3.0 percent target for a while. Colombia's inflation rate tumbled to 2.8 percent in November, a low for the year and the lowest rate since 2010, from 3.1 percent in October.
"In short, the Colombian economy is growing below its potential, observed and projected inflation is falling below the target of 3%, and no looming upward pressure on it in the future," the central bank said, adding that the balance of risks assessment pointed toward reducing the interest rate.
Monetary policy in 2013 will aimed at restoring the economy to close to its productive capacity, without threatening the inflation target and macroeconomic stability, it added.
At its November policy meeting, Colombia's central bank surprised markets by cutting rates and earlier this month Colombia's President Juan Manuel Santos said the central bank's board would probably be reluctant to cut rates further.
Economist had expected to the bank to keep rates on hold this month following the November surprise, noting that the board had approved the rate cut by a vote of 4-3, with the finance minister voting for a cut to help curb the appreciation of the peso.