Serbia’s short-term inflation expectations, currently assessed at 3.8% by the financial sector, provide a useful anchor for translating macro signals into a forward-looking framework for inflation, interest rates, and credit dynamics through 2026–2028. This figure sits comfortably within the National Bank of Serbia’s (NBS) formal inflation target of 3.0% ± 1.5 percentage points, but it does not imply a return to low inflation in absolute terms. Instead, it signals a regime of contained but persistent inflation, one that requires monetary policy to remain at least moderately restrictive while allowing gradual normalization in credit conditions.
The most realistic interpretation of the 3.8% expectation is that markets believe Serbia can avoid renewed inflationary instability, but not that price growth will quickly converge to the lower bound of the target range. Inflation expectations at this level suggest that price formation is stabilising around the upper half of the policy corridor, reflecting lingering services inflation, wage dynamics, and imported cost sensitivity rather than demand overheating.
Under a base-case macro environment—defined by the absence of a renewed global commodity shock, effective exchange-rate management, and contained wage growth—headline consumer price inflation is likely to average 3.5–4.2% in 2026, easing to 3.0–3.8% in 2027, and stabilising around 2.8–3.5% in 2028. On a year-end basis, which is more relevant for wage negotiations and interest-rate expectations, this implies CPI ending 2026 in the 3.3–4.3% range, 2027 in 2.8–3.8%, and 2028 in 2.6–3.5%. This trajectory is consistent with a system where inflation is no longer accelerating but remains structurally above pre-pandemic norms.
From a monetary-policy perspective, inflation expectations of 3.8% imply that the key transmission variable is the real interest rate, not the nominal policy rate alone. If the effective policy corridor in 2026 remains around 5.0–6.0%, the implied ex-ante real policy rate ranges between +1.2 and +2.2 percentage points, depending on the precise nominal level. That real-rate corridor is sufficiently restrictive to keep expectations anchored but not so tight as to suppress household credit outright. As inflation gradually eases toward ~3.0–3.5% in 2027–2028, maintaining the same nominal stance would mechanically raise real rates, implying that some easing or at least a reduction in restrictive intensity would be required to avoid an unintended tightening of financial conditions.
Translating this inflation–rate interaction into credit dynamics highlights why Serbia’s banking system remains liquid but cautious. With a credit-to-deposit ratio of roughly ~80%, banks are not constrained by funding availability. The constraint lies in risk pricing and underwriting discipline. In the base case, total credit growth is likely to decelerate from the late-2025 pace but remain solid, in the 9–12% range in 2026, 8–11% in 2027, and 7–10% in 2028. Household lending continues to lead, expanding at 11–15% in 2026 and gradually moderating thereafter, while corporate lending lags at 6–9% in 2026 and remains selective through 2027–2028, reflecting banks’ preference for prime borrowers and collateralised exposure.
Even in this benign scenario, asset quality does not remain static. With non-performing loans near ~2%, a gradual normalization is statistically inevitable as portfolios season and credit growth remains household-led. A realistic path sees NPL ratios drifting toward 2.3–2.8% by end-2026, 2.5–3.2% by end-2027, and 2.7–3.5% by end-2028, without implying systemic stress. This reflects consumer credit seasoning and SME margin pressure rather than a broad deterioration in credit quality.
Stress scenarios illustrate how quickly the inflation–credit balance can shift. In an external commodity shock—most plausibly energy or food—headline inflation could rise by +1.0 to +2.0 percentage points for up to a year, pushing 2026 CPI into the 4.8–6.0% range and keeping 2027 inflation closer to 3.8–5.0%. In such a case, nominal policy rates would likely remain higher for longer, compressing real rates just as inflation rises. Credit growth would slow to 5–8%, with household affordability constraints binding first, and NPL ratios could move toward 3.2–4.5% by end-2027.
An exchange-rate pass-through shock would be more destabilising for expectations. Even a managed depreciation could lift tradables inflation quickly, potentially pushing short-term expectations from 3.8% toward 4.5–5.5%. In that scenario, the NBS would be forced to prioritise credibility and FX stability, maintaining tighter real rates. Credit growth would slow more sharply, potentially to 3–6%, with corporate lending particularly constrained and NPL dispersion widening between euro-revenue borrowers and dinar-income households and SMEs.
A third risk scenario lies in wage-driven services inflation. If nominal wages rise persistently faster than productivity, core inflation could remain sticky in the 4.0–5.0% range even without external shocks. This would require real policy rates to stay positive for longer, reinforcing conservative bank behaviour. Credit growth would likely remain moderate at 5–9%, increasingly polarised between prime borrowers and riskier segments, with NPL ratios settling structurally higher than in the base case.
Taken together, these scenarios frame Serbia’s macro outlook around a clear anchor. The 3.8% inflation expectation signals confidence in policy credibility, but it also implies that monetary conditions will remain disciplined until inflation convincingly converges toward ~3%. For the banking sector, this means liquidity will stay ample but credit expansion will remain selective. For borrowers and investors, the implication is that Serbia’s growth path through 2026–2028 is one of controlled normalization rather than rapid easing, with households and prime corporates continuing to access credit while SMEs remain the primary transmission channel for any macroeconomic shock.
