Grupo Cibest, the Medellín-based financial holding company that owns Bancolombia (NYSE: CIB), has cut its 2026 economic growth forecast for Colombia to 2.6% from 2.9%, warning that the economy is losing traction as its main growth engines tire, inflation reaccelerates, and the public finances deteriorate.

The downgrade came in the bank’s mid-year update of economic projections, prepared by its economic, sectoral, and market research division under research director Laura Clavijo. The team framed 2026 as a year of macroeconomic stabilization shadowed by mounting medium-term challenges, with risks tilted to the downside for growth and to the upside for inflation and interest rates.

Growth concentrated in consumption and public spending

According to the report, gross domestic product expanded 2.2% year over year in the first quarter of 2026, and just 0.6% from the previous quarter in seasonally adjusted terms, undershooting the bank’s earlier expectations. Grupo Cibest attributes the slowdown to the exhaustion of the two drivers that carried the post-pandemic recovery: private consumption and public spending. The bank had earlier shown Colombia’s economy accelerating into the second quarter, but its NowCast model has since held growth estimates near 2.6%.

“In sum, the Colombian economy moves through 2026 in an environment of converging risks that challenges progress on structural gains.” — Grupo Cibest economic research team

The research team expects private consumption growth to ease to 2.8% in 2026 from 3.5% in 2025, pressured by high interest rates and inflation, even as remittances and a resilient labor market continue to support household spending. Public spending is projected to grow about 6.0%, after 8.4% in 2025, helped by the activation of the escape clause in the Regla Fiscal (Fiscal Rule), which gives the government more room to run an elevated deficit. Fixed investment is forecast to rise 3.5%.

The expansion would be uneven across sectors. Mining is expected to keep contracting, falling about 5.3% on lower coal and oil extraction, while construction declines 1.6% amid high financing costs and a difficult housing market. Manufacturing growth depends largely on household demand, and services, led by entertainment, remain the principal driver of the economy. On the external side, the bank sees exports growing 2.9% and imports 6.3%, narrowing the goods trade gap relative to prior forecasts.

Inflation reaccelerates, central bank turns more restrictive

The report describes a fresh setback in the inflation cycle that will slow convergence toward the central bank’s target. Consumer inflation rose to 5.84% in May from 5.10% at the close of 2025, and Grupo Cibest expects it to climb to roughly 6.4% by the end of 2026, driven by widespread price indexation, this year’s minimum-wage increase, and inflationary inertia. A strong El Niño event, recently declared, poses an additional upside risk through food and energy supply shocks, with the bank estimating a severe episode could add 0.7 to 1.9 percentage points to annual inflation. Pressures are most persistent in services, which make up close to half of the consumption basket.

Against that backdrop, the Banco de la República (Colombia’s central bank) has interrupted its rate-cutting cycle and shifted to a more contractionary stance, having already moved to lift rates earlier in the year amid inflationary pressure. Grupo Cibest projects the policy rate will reach 12.75% by the end of 2026, an additional 150 basis points from current levels and a level not seen since February 2024, and stay elevated through much of 2027 before a gradual normalization that would bring it toward 7.0% by 2030. Twelve-month inflation expectations stand at 5.5% and 24-month expectations at 4.3%, both above the central bank’s 2.0% to 4.0% tolerance range.

Fiscal deterioration the main vulnerability

Grupo Cibest singles out the fiscal front as the principal source of macroeconomic vulnerability. The bank projects a Central National Government deficit of about 6.5% of GDP in 2026, above the 5.3% the Ministerio de Hacienda (Finance Ministry) laid out in its Marco Fiscal de Mediano Plazo (Medium-Term Fiscal Framework) in early June. The research team considers the official framework optimistic, particularly on inflation and primary spending, and estimates the primary deficit will near 3.2% of GDP rather than the official 2.1%.

Revenue performance has been strong: tax collection reached roughly 139.3 trillion COP by May, up 9.4% year over year and surpassing the targets set by the national tax authority, DIAN. But high budget execution and spending rigidity have made the required adjustment difficult, with commitments through May reaching 259.8 trillion COP, about 27.5 trillion COP above plan. To hit its fiscal target, the government would need to cut some 33.2 trillion COP from the 2026 budget, which the bank calls improbable given recent execution. As a result, gross public debt could rise to 65.9% of GDP, approaching 66%, and the heavier reliance on local-currency bond issuance to cover financing needs would keep upward pressure on yields. Grupo Cibest argues the absence of structural adjustment reinforces the need for a tax reform raising close to 1.6% of GDP to stabilize the debt trajectory. The fiscal picture echoes recent warnings from rating agencies, including Fitch’s view that revised deficit targets heighten fiscal uncertainty.

External accounts improve, peso firms

The external picture is more favorable. The bank estimates the current account deficit will narrow to 2.3% of GDP in 2026 from 2.4% in 2025, well below the pre-pandemic decade average, before widening gradually toward 3.3% over the medium term. The improvement reflects stronger exports, favorable commodity prices led by oil, and record remittance inflows that have climbed to near 4.0% of GDP. The bank sees Brent crude averaging $86 USD per barrel in 2026.

The Colombian peso has appreciated 9.2% so far this year, supported by capital flows returning to Latin America, the central bank’s rate-hike cycle, strong remittances, and expectations around the change of government. Grupo Cibest revised its average exchange rate forecast down to 3,635 COP per dollar and expects the currency to trade between 3,400 and 3,650 COP per dollar in the second half, with the trajectory hinging on credible signals of fiscal consolidation. The bank had earlier flagged a firmer peso after the currency’s appreciation in April.

Stabilization, with conditions

For the medium term, Grupo Cibest expects growth to stabilize around potential, near 2.6% to 2.7% annually through 2030, with the unemployment rate averaging 9.0% in 2026, and credit growth moderating to 1.9% in real terms while loan quality holds near a 3.9% non-performing ratio. The bank notes that a new administration, after Colombia confirmed a change of government on June 21, could improve investor expectations to the extent it advances a more market-oriented agenda, though it cautions that high interest rates will continue to weigh on private investment in capital-intensive sectors such as mining and construction.

The report ties its outlook to the persistence of converging risks. “In sum, the Colombian economy moves through 2026 in an environment of converging risks that challenges progress on structural gains,” the research team wrote, pointing to the loss of momentum in growth drivers, persistent inflationary pressures, significant fiscal deterioration, and more restrictive financial conditions.

Colombia’s economy showed signs of acceleration in the rolling quarter ended in May 2026, according to the latest NowCast Bancolombia report published June 3 by Grupo Cibest, the quantitative research arm of Bancolombia (NYSE: CIB, BVC: BCOLOMBIA). The proprietary economic activity index registered a year-over-year expansion of 2.9% on a three-month moving average basis for the March–May 2026 period, up from 2.2% recorded in the comparable period a year earlier and an improvement of 30 basis points over the prior month’s reading, which was itself revised upward by 30 basis points from an initial estimate of 2.3%.

The report’s authors describe the result as marking a shift in the growth trend, with second-quarter 2026 conditions appearing more favorable than those observed in the first quarter. On a seasonally adjusted month-over-month basis, however, the index showed no change from the prior month, registering 0.0%. On a year-over-year basis using the original, non-seasonally adjusted series, growth came in at 2.2% for May 2026.

For the full second quarter of 2026, the NowCast model projects year-over-year GDP growth of 2.6%, based on the May 31 reading. That estimate is slightly below the market consensus tracked by Latin Focus Consensus Forecasts, which has held steady at 2.7%. The NowCast estimate for 2Q26 was revised up from 2.4% as of April 30.

The NowCast Bancolombia index is constructed by Grupo Cibest using transaction data from the channels and payment methods of the Bancolombia group, processed through quantitative and analytical tools to generate high-frequency estimates of productive activity in Colombia. The index is designed as a complement to official statistics published by the National Administrative Department of Statistics (Departamento Administrativo Nacional de Estadística, DANE) and is not a substitute for official GDP figures.

“The data suggests that conditions in 2Q26 to date are more favorable than those observed in 1Q26.” — NowCast Bancolombia, June 3, 2026, Grupo Cibest

Sector Performance

At the sector level, the rolling quarter ended in May points to a broad consolidation of trends across Colombia’s productive sectors. Commerce (wholesales and retail) held growth near 3.3% year-over-year, continuing a trend that has been sustained through the first half of 2026. Public administration posted 4.7% year-over-year growth in May, maintaining steady expansion. Real estate services continued its stable trajectory at 2.0%, while financial services accelerated to 5.6% year-over-year in May, up from 2.8% in March.

Construction recorded 3.6% year-over-year growth in May after a period of deceleration that had brought the sector down from highs above 6% in mid-2025. Agriculture registered 3.5% year-over-year growth in May, also showing renewed momentum after a softer stretch earlier in the year. Manufacturing reached 2.4% in May, a modest acceleration from 0.9% in February. Entertainment posted the strongest reading in the heat map at 6.6% year-over-year in May, continuing a recovery that began in mid-2025. Mining remained in modest positive territory at 1.3% in May, though it has been volatile, dipping into negative readings as recently as February 2026 at -2.4%.

The information sector was the weakest performer, posting only 0.2% year-over-year growth in May after recording negative readings in the November 2025 through February 2026 period. Utilities registered 2.2% growth in May, and professional services came in at 1.9%.

The NowCast report was prepared by Arturo Yesid González Peña, Head of Quantitative and Analytics, and Sebastián Ospina Cuartas, Data Controller, within Grupo Cibest’s Economic, Industry and Market Research area. The index is available on Bloomberg under the ticker ALLX COBC<GO>. The report carries a standard disclaimer noting that its projections are subject to risks and uncertainties, and that actual results may differ materially from estimates contained in the document. It does not constitute investment advice.

Above photo: Leatherworking machinery on display at Colombia’s Leather Expo in Bogotá (photo: Loren Moss)

The law includes a cut in corporate tax rates, investment incentives, and anti-tax evasion measures. When the Constitutional Court invalidated the measure on procedural grounds, the stock market did not react negatively, and ratings agencies did not foresee a significant impact.

“At the time the tax reform passed, we stated that our models suggested a positive effect on GDP, through the accumulation of private capital due to the reduction of the corporate tax burden. However, we also warned that the tax uncertainty that prevails in our country would lessen the effective impact of the increase in investment on growth. In that sense, we maintained our projection of GDP variation for 2019 at 3.2%,” said Bancolombia in a statement.

Colombia’s largest bank added: “One of Colombia’s greatest strengths for international investors and risk rating agencies is the commitment of the authorities to an orderly management of the economy, and to make decisions aligned with preserving the sovereign credit status. Thus, it is foreseeable that at this juncture market agents would provide the Government a time window for actions to be taken in order to resolve the situation arising from this ruling. We do not expect a permanent negative effect on risk premiums or the level of the Colombian Peso.”

According to Fitch Ratings, “The Financing Law has been revenue positive this year and should help to contribute to the government meeting its 2019 2.4% of GDP fiscal deficit target. We previously highlighted that meeting the target without one-off asset sales would be a positive development. However, the corporate tax rate cuts and investment incentives that are due to begin in 2020 would have also led to significant revenue losses beginning that year and we maintain that the law would not have been significant for addressing the structural deficit in line with achieving the 1% of GDP target set out in the country’s Fiscal Rule. However, the law included tax administration measures that would help reduce tax evasion and improve efficiencies, but this was difficult to quantify in terms of revenue impact.”

The Constitutional Court has ruled frequently on fiscal and economic matters in the past and this latest decision raises questions about judicial security and risks to economic policymaking from in general, opined Fitch. However, as the decision itself does not fundamentally alter Colombia’s fiscal, economic growth or debt trajectory, or policy credibility, it is not likely to have a significant effect on the country’s credit profile.

Fitch revised Colombia’s rating outlook to Negative earlier this year to reflect risks to fiscal consolidation, the direction of government debt, increasing external imbalances and weakening fiscal policy credibility. Despite an economic recovery, the country faces challenging fiscal deficit targets that have been revised several times in the past several years and a rising debt/GDP ratio. A widening current account deficit, estimated to exceed 4% of GDP in 2019-20, also points to increasing external risks.

While still significantly higher than the 1.6% growth that the Medellín-based bank estimates Colombia experienced in 2017, this is below the 3.0% projected by the International Monetary Fund (IMF) and the 2.9% forecast by the World Bank. Even the more pessimistic Colombian central bank (Banco de la República) has set its expectations at 2.7% growth this year.

“We expect the manufacturing industry and retail to gain traction in 2018 … Construction would return to positive territory driven by civil works. Mining would be favored by the good moment of global growth.“ – Bancolombia

Regardless of the disparity, in its analysis, Bancolombia has highlighted the positive factors that will lead to improvements this year, including higher commodities prices, improved household consumption, and a more balanced economic growth across various sectors.

“We expect the manufacturing industry and retail to gain traction in 2018,” wrote Bancolombia in its analysis. “Retail would go from growing 0.7% in 2017 to 2.3% in 2018. Construction would return to positive territory driven by civil works. Mining would be favored by the good moment of global growth.“

Bancolombia also projects household consumption to jump from 1.6% growth in 2017 to 2.6% in the year ahead, while unemployment will average 10.9% and the currency exchange rate will average 2,935 pesos to the U.S. dollar.

Higher oil prices will be a large factor in driving recovery. Bancolombia predicts that the per-barrel price of oil will average $57 USD in 2018, up by more than $6 USD from its prior expectations. Though “volatility will remain high” the bank says that “the good performance of the developed economies and the foreseeable reduction in inventories will allow prices to be maintained in the short term.”

These, and other factors — including higher-than-expected oil prices, more private investment, increased exports and a faster recovery in construction — have also led Bancolombia to set its most-optimistic outlook for GDP growth at 3.3%. While this is balanced on the low end by a worst-case possibility of 2.1%, Colombia’s largest bank believes that the second half of the year, after the congressional and presidential elections are complete, will show better results than the initial six months of 2018.

Capital Economics Forecast: 2.5% Growth

One other analyst group that agrees with Bancolombia is the London-based Capital Economics. In an analysis released this week, it projected the same 2.5% GDP growth for Colombia in 2018.

The research firm cites also higher oil prices — predicting the per-barrel price to be 5% above the 2017 average — as a key factor that will drive growth this year. Better returns will lead to more investment from the sector as well as increased output, according to Capital Economics.

Amid the recovery, the organization also sees lower inflation and interest rates spurring more consumer spending and better credit conditions. Moreover, the government is likely to take a less severe stance regarding the austerity plan it has been operating under for in recent years.

READ MORE: IMF Projects Colombian GDP to Grow by 3.0% in 2018

“The budget deficit narrowed from a peak of over 4% of GDP in 2016 to 3% of GDP last year as the government reined in spending and hiked the VAT rate,” stated Capital Economics. “While the government’s 2018 budget envisages another year of fiscal austerity, the size of this year’s fiscal squeeze (equivalent to 0.5% of GDP) will be smaller than last year’s (about 1% of GDP).”

And in the eyes of Capital Economics, this will be the case regardless of who takes over as president in the mid-year election. While the leading candidates have conflicting campaign positions on key economic policy areas, the differences are unlikely to prove material in terms of the nation’s overall trajectory.

“Ultimately, we do not think any would mark a significant departure from Colombia’s relatively market-friendly economic policies,” stated Capital Economics.

Photo: Bancolombia headquarters in Medellín, Colombia. (Credit: Juan Camilo Trujillo)

The prediction, released this week following the Banco de la República’s January meeting, included caution about “uncertainty over” the economy’s “pace of recovery.”

Still, the central bank has seen positive signs in various forms, including the currency benefits for the peso amid a weakened dollar, higher external demand, and a recovery in oil prices.

“Should this trend continue,” stated the central bank, “the country’s terms of trade would continue improving and, together with the better dynamics expected from external demand, would continue to favor the recovery of the country’s external income.”

The projection is more pessimistic than two other forecasts this mont. The IMF projected Colombian GDP to increase by 3.0% in 2018, while the World Bank expects 2.9% growth.

READ MORE: IMF Projects Colombian GDP to Grow by 3.0% in 2018

“In Colombia, growth has picked up gradually as the negative effects of the large fall in oil prices of 2014-16 fade,” wrote Alejandro Werner, director of the Western Hemisphere for the IMF, in a regional analysis. “Falling inflation has made room for growth-supporting monetary easing. Against a background of improving global growth and rising oil prices, the outlook is for a strengthening of the recovery and continued convergence of inflation to the target.”

Looking further ahead, the IMF projects 3.6% expansion for Colombia in 2019.

The World Bank’s longer-term forecast is for the Colombian economy to grow by 3.4% in both 2019 and 2020.

“Growth in Colombia is expected to pick up through the forecast period as moderating inflation supports private consumption, export growth recovers on rising oil prices, the 4G road infrastructure program is executed, and structural reforms to enhance competitiveness and foster diversification are implemented,” stated the World Bank in its “Global Economic Prospects” report.

(Photo credit: kschneider2991 / Pixabay)

This rate is also an improvement from the IMF’s last forecast, in October 2017, when it had projected the Colombian gross domestic product (GDP) to grow by 2.8% in 2018.

If the forecast can be met, it would represent a significant turnaround for the Andean nation, which has been suffering through a slowdown during the past two years with growth of less than 2.0% (an estimated 1.70% in 2017 and 1.96% in 2016.)

“In Colombia, growth has picked up gradually as the negative effects of the large fall in oil prices of 2014-16 fade,” wrote Alejandro Werner, director of the Western Hemisphere for the IMF, in a regional analysis. “Falling inflation has made room for growth-supporting monetary easing. Against a background of improving global growth and rising oil prices, the outlook is for a strengthening of the recovery and continued convergence of inflation to the target.”

Even better news lies ahead, according to the IMF, which released its latest “World Economic Outlook” report during the World Economic Forum Annual Meeting this week in Davos, Switzerland.

In 2019, the IMF projects that the Colombian economy will grow by 3.6%, a rate not achieved by the country since 2014 when the price of oil plummeted suddenly and the Colombian peso lost around a third of its value over the subsequent 12 months.

“Medium-term growth prospects are favorable, helped by export growth and infrastructure investment,” wrote Werner.

Regional Recovery

The IMF believes that several other Latin American countries will join Colombia in a wider recovery for the region, which it expects to grow by 1.9% in 2017 and 2.6% in 2019. While these figures remain modest compared to earlier in the decade when commodities were booming, they represent a significant turnaround from the 1.3% growth of 2017 and the recession, with a -0.7 contraction, seen in 2016.

Ongoing progress for Brazil, by the largest economy in the region, is the key driver. According to the IMF, it will see its GDP grow by 1.9% in 2018 — following 1.1% growth estimated in 2017 and a massive 3.5% contraction during the 2016 recession.

For now, the IMF is also projecting that Mexico, while mired in the uncertainty of ongoing NAFTA discussion with the United States and Canada, will also show incremental improvement with 2.3% growth in 2018 and 3.0% in 2019.

Chile is projected to match Colombia’s improvement, from 1.7% in 2017 to 3.0% in 2018, while Peru is expected to lead all large Latin American economies with 4.0% expansion in 2018 (and the same rate again in 2019).

Argentina and Ecuador are the only two large economies expected to backslide. While the overall recovery will continue in Argentina — which endured a 2.2% contraction during the recession in 2016 — it is only projected to grow by 2.5% in 2018, down slightly from the 2.8% estimate for 2017. Ecuador will grow by 2.2% in 2018, down from the estimated 2017 rate of 2.7%.

Risks Remain to Regional Progress

While the region is generally poised for growth, Werner and the IMF warn that challenges remain for the longer-term and several risks, notably the many elections looming in the region this year, could disrupt expectations.

“Several risks could hurt the region’s recovery,” wrote Werner. “Upcoming elections in many countries creates economic and policy uncertainties in the next year. Pressures for inward-looking policies in advanced economies — including through a retreat from cross-border integration — and factors such as global geopolitical tensions and extreme weather events could compound these uncertainties.”

Moreover, while the entire global economic outlook for 2018 remains positive, factors beyond the control of anyone in Latin America could weigh on the potential for growth.

“Financial market conditions could tighten if inflation increases more than expected in the United States or if global financial vulnerabilities build up due to excessive risk taking during the long-lasting period of very low interest rates and low asset price volatility,” wrote Werner.

Looking further ahead, the World Bank has predicted Colombian GDP to increase by 3.4% in both 2019 and 2020. The 2019 figure is the same level that the bank had forecast for the country last June.

In addition to improving domestic spending and other factors that will help spur growth, the World Bank cited the expected contributions from the ongoing investment and development of the nation’s massive “4G” road and highway overhaul project, which will pump tens billions of dollars into Colombia’s infrastructure for at least the next decade.

“Growth in Colombia is expected to pick up through the forecast period as moderating inflation supports private consumption, export growth recovers on rising oil prices, the 4G road infrastructure program is executed, and structural reforms to enhance competitiveness and foster diversification are implemented,” stated the World Bank in its “Global Economic Prospects” report.

On the negative side, it states that there is considerable risk throughout the entire Latin American region, with Colombia subject to uncertainty given the changing of the guard that will come to the Casa de Nariño with May’s presidential election. After President Juan Manuel Santos completes his second, and final, term in office, the transition presents “a short-term downside risk for growth,” according to the Washington-based organization.

Looking more broadly, Latin America and the Caribbean as a whole will experience a significant recovery this year, with 2.0% growth projected. This is up from the estimated 0.9% expansion seen in 2017, which was the first positive figure for the region since 2014.

With Brazil and Argentina still getting back on their feet after recession, this figure will continue to get better in the medium term, with the region projected to hit 2.6% growth in 2019 and 2.7% growth in 2020.

Still, the World Bank notes that government debt has “increased markedly” in key economies — including Colombia, Brazil, Mexico, and Argentina — even if the debt-to-GDP ratio has fallen in each case except Brazil.

Hitting these numbers will require a general recovery in domestic growth, however, as the organization says that growth in the United States and China is “projected to decelerate in 2019 and 2020” and that commodities prices are unlikely to prop up results as in the past.

“The baseline outlook of accelerating regional growth is supported by strengthening private consumption and investment, particularly in commodity-exporting countries in the region,” stated the World Bank. “Domestic demand is expected to respond to strengthening confidence, relatively low inflation and still supportive, if somewhat tighter, global financing conditions.”

Global GDP growth is projected at 3.1% for 2018 based upon ongoing recovery in investment, manufacturing, and trade. Within this, emerging market and developing economies will growth by 4.5%, according to World Bank projections, largely on the strength of better performance among commodity exporters.

“Although near-term growth could surprise on the upside, the global outlook is still subject to substantial downside risks, including the possibility of financial stress, increased protectionism, and rising geopolitical tensions,” stated the report.

(Credit: Ministry of Telecom and Mass Communications of the Russian Federation / Minsvyaz.ru)

This more pessimistic outlook, which came on the same day that the International Monetary Fund released the same downgrade in expectations in its world economic update, predicts that Colombia will match its 2.0% growth rate from 2016, which was its lowest figure since 2009.

Low oil prices have continued to weigh on the nation’s economy and domestic demand has remained weak given the overall climate on top of a controversial tax reform passed in December that increased the national value-added tax (VAT) from 16% to 19% in order to make up for a large hole in the federal budget due to the loss of oil revenue.

Cárdenas said that the Ministry of Finance and Public Credit has also lowered its forecast for GDP growth in 2018 from 3.5% to 3.0%. The IMF projects the same 3.0% increase for the Colombian economy in 2018.

Earlier this month, the finance minister said that the slow growth has led his department to make massive spending cuts to the 2018 budget proposal that he is expected to submit to Congress later this week. In an interview with the Bogotá-based publication El Tiempo, Cárdenas said his budget may call for cuts of as much as 5 trillion pesos, or around $1.6 billion USD at the current exchange rate.

While 2.0% growth is very low by Colombia’s recent historical standards — GDP grew by 4.4% in 2014 and 6.6% in 2011, per the World Bank — this rate still puts the nation ahead of most of its regional peers. Among large Latin American economies, only Peru (3.9%) and Mexico (2.3%) realized growth above 2.0% in 2016. Brazil (-3.6%), Argentina (-2.2%), and Venezuela (-18.0%) were all in recession.

For 2017, the IMF forecasts that only Peru (2.7%) and Argentina (2.4%) will beat its current 2.0% projection for Colombia. “These forecasts for Colombia’s growth are much higher compared to the other scenarios in Latin America,” said Cárdenas.”In fact, the IMF expects the region this year to grow 1.0% — we will grow 2%. And next year 1.9% for the continent — and 3% for us.”

If the prediction comes true, it would match Colombia’s 2.0% growth rate in 2016, the Andean nation’s worst economic year since 2009 during the height of the global economic downturn.

The turn toward pessimism is even more pronounced when compared to the IMF’s prediction at this time last year. In July 2016, the IMF expected Colombia’s GDP to grow by 3.0% in 2017, a full percentage point higher than the current forecast.

“In Colombia, guided by timely policy tightening, the orderly economic slowdown has continued this year as domestic demand — particularly investment — adjusts to a permanent shock to national income from decreased oil prices,” wrote Alejandro Werner, director of the Western Hemisphere for the IMF, in his analysis.

The IMF has, however, maintained its prior expectations for Colombia’s 2018 growth rate at a steady 3.0%. Werner says that the longer-term view is more favorable for recovery given macroeconomic factors as well as internal policies surrounding a significant tax reform passed last December, massive investment planned for infrastructure, and the continued implementation of the peace accord signed late last year between the administration of President Juan Manuel Santos and the Revolutionary Armed Forces of Colombia (FARC) guerrilla group.

“The monetary policy easing cycle that started with inflationary pressures dissipating should support the near-term recovery,” wrote Werner, “while the peace agreement, the infrastructure agenda, and the investment-friendly tax reform should support medium-term inclusive growth.”

The latest IMF World Economic Update forecasts Colombia GDP growth to hit just 2.0% for the second straight year. (Credit: IMF)

In its update, the IMF also lowered its forecast for the entire Latin American and Caribbean region, albeit only slightly. It now expects 1.0% growth this year in the region compared to the 1.1% prediction it made in its April “World Economic Outlook” report.

While still representing slow growth, this would be a marked improvement for a region that was in recession in 2016, with a 1.0% contraction largely caused by negative rates in Brazil (which contracted by 3.6% last year), Argentina, and Venezuela.

Still, the IMF is only forecasting 1.9% growth for the region in 2018, highlighting the ongoing struggle facing Latin America’s largest economies as commodity prices remain low and domestic demand continues to be weak in many locations.

Many countries also will have major elections within the next 18 months, including presidential elections in Chile, Colombia, Mexico, and Brazil, and a mid-term congressional election in Argentina in October. Some nations, including Brazil and Peru, are also still dealing with major corruption scandals that are disrupting political agendas and adding uncertainty to the horizon.

The IMF is forecasting 2017 GDP growth in both Mexico and Peru — the only two large economies in the region to outpace Colombia’s 2.0% growth in 2016 — to come in lower than last year. Mexico is now expected to record 1.9% growth in 2017 (down from 2.3% in 2016), while the forecast has Peru at 2.7% (down from 3.9% in 2016).

“Amid low confidence, domestic demand continues to remain weak across most economies, and is expected to only recover slowly as actual output catches up to potential and internal sources of growth build strength, based on a decline in political and policy uncertainty across some major economies,” wrote Werner. “Some countries in the region will need clear strategies to adjust further following a permanent loss in commodity revenues.”

Colombia’s economy grew by just 1.1% in the first quarter of 2017, below Banco de la República’s 1.3% projection. In explaining its rate cut, the bank also stated that “economic activity indicators so far would suggest a slow dynamic for the second quarter.”

Though the 25-point rate cut was in line with the consensus prediction of analysts surveyed by Reuters, it was a smaller reduction than last month’s 50-point cut. While the decision to decrease the rate was unanimous among the seven-member board, the 25-point cut narrowly won with a 4 to 3 vote. The dissenters all preferred another 50-point reduction.

“Colombia’s central bank didn’t provide much of an explanation for its decision to slow the pace of interest rate cuts to 25 basis points at this month’s policy meeting, but our sense is that it may have been spooked by April’s inflation data, which were a touch stronger than expected,” said Neil Shearing, chief emerging markets economist at London-based analyst firm Capital Economics, in a note to investors.

While inflation remains less than half of the 16-year high of 8.97% hit last summer, the drop toward the central bank’s target range of between 2%-4% has stalled. The year-end inflation projection from market analysts for December 2017 now stands at 4.5%, a small but significant uptick from the 4.45% estimate reported in April.

Thus, the central bankers now appear to be trying to walk the middle ground between a continuing inflation drop and growth that “remains below the country’s productive potential,” according to report issued by Bancolombia before the decision.

Despite the sluggish economic expansion, Bancolombia said that, “from the perspective of growth, we do not consider that a cut above 25 basis points is justified at this moment.” It projects that the bank will continue on a cautious path, making only another 50-point cut cumulatively for the rest of the year to end 2017 at 5.75%.

Capital Economics, however, sees a potential return to larger cuts later in the year and a year-end rate of 4.5%. The firm notes that this estimate is “well below the current consensus,” but it believes that “Colombia’s central bank still has more work to do.”

The central bank has now cut the nation’s key interest rate from a high of 7.75% to 6.25% since it made its first decrease of a new easing cycle in December 2016. It currently is predicting Colombia’s GDP to grow by just 1.8% in 2017, below the 2.3% predicted by the International Monetary Fund in April and the government’s target range of 2.5%.