In its latest inflation report, the National Bank of Serbia (NBS) anticipates a return to the target range for year-on-year inflation as early as this month, surpassing earlier projections. The report underscores expectations for continued inflation deceleration throughout the year, aiming for stabilization around the central target of three percent by next year. Nevertheless, challenges persist, particularly regarding oil prices and Serbia’s agricultural season.
The revised inflation projection marginally adjusts expectations for the second and third quarters downward compared to February’s forecast. This adjustment reflects a faster-than-anticipated slowdown in inflation during the year’s initial stages. Conversely, projections for the fourth quarter and beyond are slightly higher, primarily due to elevated global oil prices and agricultural product costs. Additionally, weaker domestic demand effects contribute to the adjusted forecast. The outcome of Serbia’s domestic agricultural season remains a significant factor, as highlighted in the latest NBS report.
Previously, the NBS projected inflation rates of five percent for the first quarter, 4.1 percent for the second quarter, and 3.8 percent for the third quarter, with an anticipated inflation rate of 3.6 percent for the final quarter.
Oil, Demand, Interest Rates Oil prices have exceeded $90 per barrel since the year’s outset, with global traders anticipating fluctuations post the U.S. election in November, which could impact oil price dynamics.
The NBS forecasts a downward trajectory for oil prices in the near term, albeit slightly higher than earlier projections, stabilizing around $84 per barrel by year-end. Consensus Economics aligns closely with this projection, estimating oil prices at $83 per barrel. Conversely, the U.S. Energy Information Administration (EIA) anticipates continued oil price growth until August, followed by a decline to approximately $89 per barrel by year-end.
Given projected increases in investment and consumption, the deceleration of inflation is expected to be more moderate this year compared to earlier projections. The NBS attributes this to monetary tightening measures, decreased imported inflation, anchored short-term inflation expectations, and weakening global cost pressures, alongside sluggish external demand. Lower-than-expected inflation rates in the eurozone and restrained growth in regulated prices further contribute to the disinflationary environment.
The NBS maintains its benchmark interest rate at 6.5 percent, unchanged since July of the previous year. Monetary policy decisions in March and April 2024 were based on the mid-term inflation projection from February, anticipating further inflation reduction and its return to target levels by mid-year. This trajectory aligns with reaching the central target of three percent by year-end, consistent with medium-term expectations.
Economic Outlook According to the May projection, Serbia’s GDP growth rate for this year stands at 3.5 percent, with additional acceleration expected in the following two years, ranging from four to five percent. This growth trajectory is bolstered by reduced global inflationary pressures and gradual eurozone recovery, alongside anticipated progress in planned investment projects in transportation, energy, and municipal infrastructure. The surge in domestic demand, driven by increased employment and wages, particularly in the private sector, will also contribute to growth. While private consumption remains a significant factor, its potential to induce higher inflationary pressures is deemed limited. Additionally, investments in capital assets will enhance production potential, with a low likelihood of triggering an inflation-wage spiral during the projection period.
In summary, short-term inflation expectations are on a declining trajectory, with mid-term expectations anchored within target ranges. Medium-term inflation continues its stable decline, with a negative output gap expected throughout the year. Furthermore, Serbia’s economy still operates below full employment, leaving room for increased labor market participation and reduced unemployment.
The report also highlights a positive trend in foreign direct investment (FDI), which surged by 53.4 percent year-on-year in the first quarter, totaling €1.3 billion. Investments were primarily directed towards construction, information and communication, and manufacturing sectors, reflecting continued investor confidence in Serbia’s economic potential.
