NBS Forecast Assumes $83 Oil, Warns of $120 Risk
Serbia's central bank released its August inflation forecast: $83 oil is the baseline scenario, while a $120 risk scenario would mean higher inflation and slower GDP growth.
The National Bank of Serbia (NBS) published its Inflation Report with August projections on August 23, and for the first time broke down what underlies a figure that had until now stood only as a bottom line: GDP growth of 3.2 percent. The baseline assumption is an oil price of $83 a barrel this year and $75 in 2027, while a pessimistic scenario envisions a jump to $120 if the conflict in the Middle East widens further. Previously, the central bank had released only final numbers, growth of 3.2 percent and inflation within target, without the underlying basis for those estimates.
Average inflation for 2026 was lowered to 3.2 percent, down 0.4 percentage points from the previous, May estimate. The target remains three percent, with a permitted deviation of 1.5 percentage points in either direction. According to the NBS projection, the low base from September of last year, a result of the regulation that capped retail markups at 20 percent, combined with higher global oil prices, will push inflation from September this year slightly above four percent.
NBS Governor Jorgovanka Tabakovic explained why inflation in July came in below expectations:
The lower than expected inflation of recent months, relative to what we set out in the May Inflation Report, was driven mostly by a larger year on year drop in food prices than expected, which stood at 6.1 percent in July. The slowdown in overall inflation to 1.9 percent year on year in July was dominantly the result of lower fruit and vegetable prices, due to an exceptionally good new harvest.
GDP growth raised to 3.2 percent
The projection for GDP growth this year was raised to 3.2 percent, remains at 4.5 percent for 2027, and is expected to average around 3.5 percent a year over the medium term. The largest contribution in 2026 comes from personal consumption, 2.7 percentage points, followed by fixed investment with 1.0 percentage point and government spending with 0.4 points, while exports add 0.5 percentage points to growth.
Mirjana Miletic, Deputy Director for Economic Research and Statistics at the NBS, warned of risk coming from agriculture and energy:
This could primarily be affected by the poor hydrological situation and this heat wave, which is resulting in lower electricity production from hydro sources, is having a negative impact on river transport, and could have certain negative short term effects on the processing industry and on agricultural yields as well.
The agricultural season, according to the NBS estimate, is better than the previous two. The projection for corn is a yield of 5.6 tons per hectare, up from the earlier 4.4 tons, with production growth of 23 percent. For wheat, the NBS expects a more modest increase in yield than the Statistical Office of the Republic of Serbia, which forecasts 5.9 tons per hectare.
Pessimistic scenario: oil at $120
The baseline projection, as explained by Savo Jakovljevic, General Manager of the NBS Economic Research and Statistics Sector, was built on the assumption that oil prices through the end of this year and during 2027 will run somewhat lower than the $90 a barrel seen at the time: around $83 this year and around $75 next year.
Alongside the baseline scenario, the NBS also produced a pessimistic one, in which the conflict in the Middle East, including a blockade of the Strait of Hormuz, would drag on, with a further reduction in shipping through the Red Sea. The Inflation Report states:
We estimate that in that case, the price of oil would again reach around $120 a barrel and hold at a similar level through the first quarter of 2027, after which it would gradually decline to around $112 a barrel by the end of the year.
The consequences of such a scenario would be measurable: inflation would be higher by 0.4 percentage points in 2026 and by 1.2 percentage points in 2027, while GDP growth would be lower by 0.2 percentage points this year and by 0.8 percentage points next year, compared with the baseline scenario.
Interest rate unchanged, foreign currency reserves in deficit
The key policy rate stays at 5.75 percent. Tabakovic explained why the central bank is not changing course for now:
In the period since the previous report we did not change the level of the key policy rate, which stands at 5.75 percent. In making our decisions, we took into account that geopolitical tensions continue to be reflected in volatile movements on international commodity markets.
On the foreign exchange market, supply of foreign currency prevailed from April to July, driven by exports and foreign direct investment. Over that period the NBS made net purchases of 900 million euros, bringing the deficit since the start of the year down to 320 million euros. By August 18, that shortfall had narrowed further to just 185 million euros, the Governor said:
Turbulence was more pronounced early in the year, when we sold 1.595 billion euros, and as of August 18 we had bought 1.41 billion, so we are in deficit by only 185 million euros. To those worried about whether our foreign currency reserves are bleeding and whether we will hold up, let me reassure them there is no need to worry.
Year on year growth in lending to businesses and households stood at 16.6 percent in June, driven by working capital and investment loans on the corporate side, and by cash and mortgage loans among households. The next Inflation Report, with its November projections, will show whether the agricultural season held up against the heat wave from late July, which the projections flagged as the main source of short term uncertainty.
