Serbia’s inflation picture has improved sharply during the summer, prompting Raiffeisen Bank to cut its forecast for year-end inflation to 5.1% from 5.7%, while simultaneously raising its projection for 2026 GDP growth to 3.3% from 2.8%. The combination points to a more resilient domestic economy than expected only a few months ago, but it does not yet provide the conditions for an early monetary easing cycle.
The revision reflects an unusually favourable agricultural season, particularly strong fruit and vegetable yields, together with the extension of reduced excise duties on petroleum products. Both factors have temporarily suppressed headline inflation at a time when global energy markets remain volatile. Raiffeisen has incorporated the risk that meat prices could rise from the autumn as drought reduces corn yields and increases animal-feed costs, although the bank does not currently expect that channel to generate a major inflation shock.
The latest official inflation data illustrate the scale of the change. Serbia’s consumer prices increased by only 1.9% year on year in July, down from 2.7% in June and 3.5% in May. Prices actually declined by 0.2% month on month in July, while inflation since December stood at 2.5%. Food and non-alcoholic beverage prices fell particularly strongly during the month, reflecting the arrival of the new agricultural harvest.
That headline number, however, understates the pressures still running through the Serbian economy. Raiffeisen estimates that core inflation remained at 4.5% year on year in July, indicating that domestic pricing pressures have not disappeared. Services, processed food, wages and other components less directly affected by volatile agricultural and energy prices remain materially stronger than headline CPI. This distinction is central to the monetary policy outlook. A temporary collapse in fruit and vegetable prices can push the headline rate below 2%, but it does not necessarily signal that underlying inflation has been permanently brought under control.
The divergence between headline and core inflation helps explain why the National Bank of Serbia has kept its key policy rate at 5.75% despite the sharp fall in consumer-price growth. The central bank’s inflation target is 3%, with a tolerance band of ±1.5 percentage points, meaning the formal corridor extends from 1.5% to 4.5%. July inflation therefore sits comfortably inside the target range, but the expected rebound later in the year remains important for policy decisions.
There is also a notable difference between the latest Raiffeisen forecast and the NBS’s own updated outlook. Raiffeisen expects inflation to reach 5.1% at the end of 2026, whereas the NBS’s August projection is more benign. The central bank now expects inflation to remain inside its target corridor throughout the projection period and anticipates that the annual rate will move to slightly above 4% from September, driven by base effects and higher global prices for oil and other commodities. The NBS has reduced its forecast for average 2026 inflation to 3.2%, down by 0.4 percentage points from its previous projection, while forecasting average inflation of 4.3% in 2027.
The forecasts are not directly comparable because Raiffeisen’s 5.1% figure refers to the year-end rate while the NBS’s 3.2% refers to the annual average. Yet the NBS has explicitly said it expects inflation to remain within the upper limit of its target band through the end of 2026, implying a more optimistic December trajectory than Raiffeisen’s forecast. The difference is significant because it captures the principal uncertainty facing Serbian monetary policy: whether July’s exceptionally low inflation represents the beginning of sustained disinflation or mainly a temporary agricultural and base-effect phenomenon.
For the NBS, the prudent response remains to wait. The 5.75% policy rate has now become an important nominal anchor, especially as Serbia continues to manage inflation alongside exchange-rate stability. With headline inflation at 1.9%, the ex-post real policy rate is unusually high, but that calculation becomes less impressive once expected inflation and core inflation are considered. Against core inflation of 4.5%, the real policy setting is only modestly restrictive.
Raiffeisen therefore expects the NBS to keep the policy rate at 5.75% throughout 2026, with the current balance of risks favouring a longer restrictive phase rather than an early reduction. The argument is reinforced by energy-market uncertainty, domestic wage growth and the potential demand effects of additional government measures estimated at around €600mn.
For Serbian banks, this environment is relatively constructive. A prolonged period of elevated policy rates supports lending yields and interest income, while economic growth above 3% limits the immediate deterioration in credit quality normally associated with restrictive monetary policy. Credit demand has also remained strong: NBS data earlier in the year showed annual corporate and household lending growth running at double-digit rates. The more difficult issue for banks will emerge when the monetary easing cycle eventually begins, compressing asset yields while deposit pricing adjusts with a lag.
The real economy is meanwhile performing somewhat better than anticipated. Serbia’s official flash estimate showed real GDP growth of 3.6% year on year in the second quarter of 2026, following growth of 3.2% in the first quarter. That stronger first half explains why both Raiffeisen and the NBS have recently raised their full-year expectations. Raiffeisen now sees 3.3% growth, while the NBS has moved its forecast to 3.2%.
The difference between the two forecasts is negligible in macroeconomic terms. More important is the fact that growth is running above the expectations prevailing earlier in the year despite weak external demand, geopolitical uncertainty and elevated energy costs. Serbia is therefore experiencing an unusual combination of accelerating real activity and sharply declining headline inflation.
Industrial performance remains much less convincing than the aggregate GDP numbers suggest. Industrial production increased only 0.8% year on year in June, while output during the first six months of 2026 was up just 0.7%. Manufacturing expanded 2.8% in June, but electricity, gas, steam and air-conditioning production fell 10.4%, while mining declined 1.0%. Seasonally adjusted total industrial production was also 0.4% lower than in May, with manufacturing down 1.3% month on month.
The automotive sector is one of the more visible exceptions. Raiffeisen estimates that automotive production was growing by 47.1% year on year, supported by increased demand for electric vehicles produced by Stellantis in Serbia. Electrical equipment, machinery and chemicals have also performed relatively well. The Kragujevac plant and the expansion of electric-vehicle production are therefore becoming increasingly important to Serbia’s manufacturing cycle at a time when several traditional industrial sectors remain exposed to weak eurozone demand.
Domestic consumption provides another counterweight. Retail turnover increased by 4.3% year on year in real terms in June, while real retail sales in the first half of the year were 7.0% higher than during the same period of 2025. Food, beverages and tobacco sales recorded the strongest June increase, at 6.0% in real terms.
Household purchasing power has been supported by real wage growth, higher pensions and public-sector salaries, as well as remittance inflows. Raiffeisen noted that real net wages were up 6.2% year on year in May, while remittances reached around €1.7bn during January-May, an increase of 27.5% from a year earlier. These flows strengthen consumption but also explain why the central bank remains sensitive to the possibility that domestic demand could keep services inflation and other core components elevated even as food inflation falls.
The energy balance introduces a separate set of risks. Serbia recorded a relatively modest electricity trade deficit of approximately €117mn in the first six months, according to Raiffeisen. Lower exports partly reflect the effect of carbon-related cross-border costs and weaker industrial electricity consumption, creating larger volumes available to the domestic market. At the same time, drought and lower Danube water levels have reduced hydropower availability, raising the possibility of greater electricity imports during periods of strong summer demand.
This matters because energy prices increasingly represent the most credible route through which external inflation could return to Serbia. Domestic producer prices were already 6.2% higher year on year in July, with producer energy prices up around 12%. Total industrial producer prices were 7.0% above July 2025, while the energy component was 13.3% higher. Imported energy prices showed an even larger annual increase of 13.7%.
The gap between consumer inflation at 1.9% and industrial energy-cost inflation above 10% is consequently one of the clearest reasons not to treat July CPI as a settled inflation victory. Companies can initially absorb higher energy and intermediate-input costs through margins, efficiency measures or inventory adjustments, but prolonged cost pressure eventually increases the probability of pass-through into consumer prices.
The position of Naftna Industrija Srbije, or NIS, adds another layer of uncertainty. Raiffeisen expects the company’s ownership issue to be resolved through a sale during the autumn or by year-end. NIS remains strategically important to Serbia’s fuel supply, refining system and broader energy security, making changes in ownership, licensing or operating conditions relevant not only for corporate valuations but also for inflation and the external balance.
Serbia’s external position appears capable of absorbing some deterioration in the energy trade balance. Raiffeisen argues that even an increase in energy imports caused by prolonged drought would be unlikely to produce a major deterioration in the overall trade deficit, partly because industrial activity remains below its potential and different sectors use different energy mixes. Weak eurozone demand is constraining Serbian exporters, but it is also limiting industrial energy consumption and imports of some production inputs.
The macroeconomic picture therefore remains stronger than the inflation headline alone suggests. Serbia has GDP growth running at 3.6% in the second quarter, real retail sales expanding, manufacturing supported by new automotive capacity and headline inflation temporarily below the NBS midpoint. At the same time, core inflation of 4.5%, elevated producer-energy prices and continued wage growth point to an economy where domestic and imported price pressures have moderated rather than disappeared.
That combination matters for sovereign risk and financing conditions. Continued disinflation alongside growth above 3% would strengthen Serbia’s real-rate profile and reduce the risk premium required by investors, particularly if the NBS can eventually lower rates without destabilising the dinar. A premature rate-cutting cycle would carry a different risk: reopening the inflation differential just as base effects, energy costs and wage pressures begin pushing annual CPI higher again.
The NBS is therefore in a comparatively comfortable position. It does not need to cut rates to prevent recession, because growth has accelerated, and it does not need to raise rates immediately because headline inflation remains inside the target corridor. Holding the 5.75% rate allows monetary policy to absorb further information about autumn food prices, global oil markets, wage settlements and fiscal demand before changing course.
Raiffeisen’s revised numbers reinforce that case even though its inflation forecast is more cautious than the central bank’s. Raising GDP growth to 3.3% while cutting year-end inflation to 5.1% describes an economy with stronger supply conditions and better short-term agricultural performance, but it also leaves Serbia with an inflation rate potentially above the NBS target corridor by December under the bank’s scenario.
The next phase of the inflation cycle will consequently be determined less by July’s 1.9% headline figure than by the behaviour of services, processed food, wages and energy during the autumn. Serbia has gained a significant disinflation buffer from agriculture and government measures on fuel costs. The durability of that buffer will decide when the NBS can convert today’s restrictive real interest rates into a genuine monetary easing cycle without sacrificing the price and exchange-rate stability that has become central to Serbia’s financing environment.
