Serbia’s headline inflation has fallen sharply over the summer, while stronger-than-expected economic activity has prompted Raiffeisen Bank to raise its 2026 growth forecast. The combination of lower consumer-price growth and resilient domestic demand, however, is not yet sufficient to trigger an early monetary easing cycle.
- July inflation drops to 1.9%
- NBS and Raiffeisen differ on year-end inflation
- Economic growth exceeds earlier expectations
- Manufacturing remains uneven
- Consumer spending continues to support activity
- Energy costs remain an inflation risk
- NIS ownership remains an additional uncertainty
- Fiscal and external factors shape the rate outlook
Raiffeisen now expects 2026 GDP growth of 3.3%, up from its previous forecast of 2.8%, while its year-end inflation projection has been reduced to 5.1% from 5.7%. The bank expects the National Bank of Serbia (NBS) to maintain its key policy rate at 5.75% throughout 2026.
The improvement in headline inflation has been supported by an unusually strong agricultural season, particularly higher fruit and vegetable yields, as well as the extension of reduced excise duties on petroleum products. These factors have temporarily contained consumer prices despite continued volatility in global energy markets.
July inflation drops to 1.9%
Official data show consumer prices rose just 1.9% year on year in July, compared with 2.7% in June and 3.5% in May. Prices fell 0.2% month on month, while cumulative inflation since December reached 2.5%. Food and non-alcoholic beverages recorded particularly strong price declines in July as the latest agricultural harvest reached the market. The headline rate, however, does not fully capture underlying domestic price pressures. Raiffeisen estimates that core inflation remained at 4.5% year on year in July, with services, processed food, wages and other less volatile components continuing to register stronger price growth.
The bank expects the risk of higher meat prices to increase from the autumn as drought reduces corn yields and raises animal-feed costs. It does not currently expect this mechanism to produce a major inflation shock. The divergence between headline and core inflation is a key factor behind the NBS decision to leave its policy rate unchanged at 5.75%. The central bank targets inflation at 3%, with a tolerance band of ±1.5 percentage points, creating a formal range of 1.5% to 4.5%. July’s 1.9% rate therefore remains within the target corridor, although the NBS expects inflation to increase later in the year.
NBS and Raiffeisen differ on year-end inflation
The NBS’s latest outlook is more benign than Raiffeisen’s year-end forecast. The central bank expects inflation to remain within its target corridor throughout the projection period and sees the annual rate rising to slightly above 4% from September, driven by base effects and higher global prices for oil and other commodities. The NBS has cut its forecast for average 2026 inflation to 3.2%, a reduction of 0.4 percentage points from its previous projection. It expects average inflation of 4.3% in 2027.
The two forecasts are not directly equivalent because Raiffeisen’s 5.1% projection refers to the year-end inflation rate, while the NBS’s 3.2% figure represents the annual average. Nevertheless, the NBS has indicated that inflation should remain below the upper limit of its target band through the end of 2026, implying a lower December rate than Raiffeisen anticipates. For monetary policy, the distinction is important because July’s exceptionally low inflation may reflect temporary agricultural and base effects rather than a lasting reduction in underlying price pressures.
The 5.75% policy rate remains a nominal anchor for the economy as the NBS manages both inflation and exchange-rate stability. Although the ex-post real policy rate is unusually high when measured against headline inflation of 1.9%, the degree of monetary restriction is considerably smaller against expected inflation and 4.5% core inflation. Raiffeisen therefore expects the NBS to retain the 5.75% rate throughout 2026, with risks favouring a prolonged restrictive stance rather than an early reduction. Energy-market uncertainty, domestic wage growth and the demand impact of additional government measures estimated at approximately €600 million reinforce that position.
Economic growth exceeds earlier expectations
Economic activity has also proved more resilient than expected. Serbia’s official flash estimate showed real GDP growth of 3.6% year on year in the second quarter of 2026, following 3.2% growth in the first quarter. Raiffeisen has consequently raised its full-year growth forecast to 3.3%, while the NBS now expects 3.2% growth. The stronger first half comes despite weak external demand, geopolitical uncertainty and elevated energy costs. Domestic activity has therefore accelerated at the same time that headline consumer-price growth has fallen sharply.
For Serbian banks, the combination supports a relatively favourable operating environment. Higher policy rates sustain lending yields and interest income, while economic growth above 3% limits the immediate deterioration in credit quality that can accompany restrictive monetary conditions. Credit demand has remained strong, with NBS data earlier in the year showing double-digit annual growth in corporate and household lending. The pressure on banks is more likely to emerge once monetary easing eventually begins, as asset yields decline while deposit pricing adjusts more slowly.
Manufacturing remains uneven
Industrial activity presents a weaker picture than aggregate GDP growth. Industrial production increased only 0.8% year on year in June, while output for the first six months of 2026 was up 0.7%.
Manufacturing production grew 2.8% in June, but electricity, gas, steam and air-conditioning output dropped 10.4%, while mining declined 1.0%. On a seasonally adjusted basis, total industrial production was 0.4% lower than in May, while manufacturing fell 1.3% month on month.
Automotive production has been a significant exception. Raiffeisen estimates that output in the sector was growing 47.1% year on year, supported by stronger demand for electric vehicles produced by Stellantis in Serbia. Electrical equipment, machinery and chemicals have also performed relatively well. The Kragujevac plant and expanded electric-vehicle production are consequently playing an increasingly important role in manufacturing activity while traditional industrial sectors remain exposed to weak eurozone demand.
Consumer spending continues to support activity
Domestic consumption is providing another source of economic support. Real retail turnover increased 4.3% year on year in June, while real retail sales during the first half of 2026 were 7.0% higher than in the same period of 2025. Food, beverages and tobacco recorded the strongest June increase, with real sales rising 6.0%. Household purchasing power has benefited from real wage increases, higher pensions and public-sector salaries, alongside remittance inflows. Raiffeisen reported that real net wages increased 6.2% year on year in May. Remittances amounted to approximately €1.7 billion during January-May, representing a 27.5% increase from the same period a year earlier.
The continued strength of household income and consumption also keeps domestic demand relevant to the inflation outlook, particularly because services and other core components have remained considerably stronger than headline CPI.
Energy costs remain an inflation risk
Serbia recorded a relatively modest electricity trade deficit of approximately €117 million in the first six months, according to Raiffeisen. Lower electricity exports have partly reflected carbon-related cross-border costs and weaker industrial electricity consumption, leaving larger volumes available for the domestic market. At the same time, drought and lower water levels on the Danube have reduced hydropower availability and could increase electricity imports during periods of strong summer demand.
Energy represents a significant potential channel for renewed external price pressure. Domestic producer prices increased 6.2% year on year in July, while producer energy prices rose by around 12%. Overall industrial producer prices were 7.0% higher than in July 2025, with the energy component up 13.3%. Imported energy prices recorded an even larger annual increase of 13.7%.
The gap between 1.9% consumer inflation and energy-related industrial cost increases above 10% leaves companies facing substantial cost pressures. Businesses can initially absorb higher energy and intermediate-input costs through margins, efficiency measures or inventory adjustments, but sustained increases raise the potential for eventual pass-through into consumer prices.
NIS ownership remains an additional uncertainty
The outlook for Naftna Industrija Srbije (NIS) represents another source of uncertainty for the economy and energy market. Raiffeisen expects the company’s ownership issue to be resolved through a sale during the autumn or by the end of the year. NIS remains strategically important to Serbia’s fuel supply and refining system, as well as to broader energy security.
Changes involving ownership, licensing or operating conditions therefore have implications for the company itself and for Serbia’s inflation and external-balance dynamics.
Raiffeisen expects that even prolonged drought-driven increases in energy imports would be unlikely to cause a major deterioration in the overall trade deficit. Industrial activity remains below its potential, while different sectors have different energy requirements. Weak eurozone demand is constraining Serbian exports, but it is also limiting industrial electricity consumption and imports of some production inputs.
Fiscal and external factors shape the rate outlook
Serbia’s combination of stronger economic activity and declining headline inflation creates a more favourable macroeconomic setting, but underlying price pressures remain significant. GDP growth of 3.6% in the second quarter, expanding retail activity and stronger automotive manufacturing are occurring alongside 4.5% core inflation, elevated producer-energy prices and continued wage growth.
For sovereign financing conditions, sustained disinflation alongside growth above 3% would improve Serbia’s real-rate position and could reduce the risk premium required by investors, particularly if the NBS eventually lowers interest rates without destabilising the dinar. An early easing cycle would carry the risk of allowing inflation pressures to rebuild as base effects, energy costs and wage growth begin pushing annual CPI higher. The NBS therefore has room to wait. Economic growth has accelerated rather than weakened enough to require monetary support, while headline inflation remains inside the target corridor and does not currently require an immediate rate increase.
Maintaining the 5.75% policy rate allows the central bank to monitor autumn food prices, global oil markets, wage developments and fiscal demand before adjusting its monetary stance. Raiffeisen’s revised projections reinforce this approach, combining 3.3% expected GDP growth with 5.1% year-end inflation. The bank’s scenario points to stronger economic activity and favourable short-term agricultural conditions, but also to the possibility that inflation could return above the NBS target corridor by December. The behaviour of services, processed food, wages and energy prices during the autumn will therefore determine how durable the current decline in headline inflation proves to be.
