NBS flags Middle East energy shock risk for Serbia’s inflation path and growth outlook

Serbia’s macroeconomic outlook is entering a more volatile phase, according to the National Bank of Serbia (NBS), with geopolitical energy risks now acting as the dominant force behind inflation dynamics, monetary-policy uncertainty and medium-term growth. While the central bank portrays Serbia as fundamentally stable, it warns that imported inflation pressures tied to global energy markets are rising—and investors will be watching closely how quickly those pressures fade.

Energy shock scenario becomes the report’s main risk

The NBS finalized the report after escalation of conflict in the Middle East and explicitly frames the global energy shock as the primary macroeconomic risk scenario for Serbia and the wider economy. It points to the closure of the Strait of Hormuz and attacks on regional energy infrastructure as triggers for sharp oil-price increases and broader commodity volatility. Those moves, in turn, are expected to feed into inflation expectations and financial-market stress globally.

Growth forecast downgraded for 2026

The central bank expects Serbian GDP growth to slow to 3.0% in 2026, down from a previous forecast of 3.5%. Growth is projected to accelerate toward 4.5% in 2027, largely due to infrastructure and consumption effects linked to Expo 2027. The NBS links this shift to a structural concern: Serbia’s growth model remains highly dependent on imported energy pricing, European external demand and investor confidence flows.

Inflation near target now, but likely to overshoot later

Inflation is relatively controlled at present. Headline inflation was 2.8% year-on-year in March 2026, slightly below the NBS target midpoint of 3%. However, the NBS now acknowledges that inflation is likely to move temporarily above the upper bound of the target range toward the end of 2026 and early 2027 due to rising global energy prices and unfavorable base effects—an explicit change in tone from earlier reports where normalization had seemed more secure.

The report also highlights a changing inflation structure. Food prices remain subdued, aided by government measures and prior retail margin caps; prices of food and non-alcoholic beverages were down 1.2% year-on-year in March. Instead, pressure is increasingly concentrated in services and energy.

Core inflation averaged 4.2% in Q1 2026, driven mainly by service-sector prices that rose 6.3% year-on-year in March. The NBS connects this pattern to higher labor costs alongside growth in real household disposable income.

Fiscal policy directly moderates fuel-price pass-through

Energy prices accelerated after the Middle East shock. Domestic petroleum product prices rose 3.5% during February and March following surging global oil prices. The NBS says Serbia avoided even stronger increases only because the government temporarily reduced fuel excise duties by 20%, later revised to 25%. In effect, fiscal policy is operating as an immediate instrument for managing inflation pass-through from global energy costs.

Policy rate held steady amid a balancing act

Despite geopolitical volatility, the NBS kept its key policy rate unchanged at 5.75%, where it has been since September 2024. The central bank signals caution rather than aggressive tightening: further tightening could suppress already slowing growth and weaken investment activity, but allowing inflation expectations to become unanchored would raise risks of broader macroeconomic instability.

The NBS states that inflation expectations remain relatively stable. Financial-sector expectations for one-, two- and three-year horizons are close to the 3% target midpoint, while corporate-sector expectations hover around 4%.

Banking resilience and buffers help absorb shocks

The report emphasizes relative resilience in Serbia’s banking sector entering this new phase of imported-inflation pressure. Lending growth accelerated to nearly 17% year-on-year in March, supported by working-capital and investment lending to corporates as well as housing and cash loans to households. Non-performing loans remain historically low at 2.1% of total loans.

External buffers also look strong. The NBS reported foreign-exchange reserves of €28.2 billion at end-April despite FX-market sales totaling about €1.2 billion during Q1 and April combined. The central bank describes these reserves as a critical absorber against volatility in capital flows and exchange-rate instability.

Expansionary fiscal stance alongside manageable debt

Fiscal policy is becoming increasingly expansionary even as debt remains under control. The fiscal deficit reached 4.5% of projected GDP in Q1, above the planned annual target of 3%, driven by infrastructure investment, public wages, pensions and subsidies. Still, public debt is described as manageable at roughly 42% of GDP—well below Maastricht thresholds—reflecting a strategic choice to prioritize growth support and infrastructure development despite worsening external conditions.

Expo-linked investment remains central

The NBS repeatedly reinforces Expo 2027 as an anchor for medium-term expectations through its “Leap into the Future – Serbia Expo 2027” infrastructure cycle. That framing implies Serbia’s trajectory over coming years will depend heavily on executing large-scale public investment programs successfully.

External account: deficit expected to widen with higher energy imports

The outlook for Serbia’s external position is described as complex but not uniformly deteriorating across components. The current-account deficit was only 0.8% of GDP in Q1; however, the NBS expects it to widen toward about 6% of GDP due primarily to higher annual energy-import costs.

At the same time, goods exports rose by 7.4% year-on-year, supported mainly by manufacturing—especially automotive-related sectors—with dedicated attention given in particular to analysis of Fiat Grande Panda production implications for industrial output and exports.

Imported inflation transmission is quantified—and matters for an energy-intensive economy

A key structural theme throughout the report is increasing recognition of how imported commodity shocks transmit into domestic prices across supply chains. The NBS devotes an extensive section to oil-price shock transmission through Serbia’s economy, concluding that oil-price increases have broad indirect effects across food production, chemicals, manufacturing, transportation and industrial supply chains.

The report estimates that about 54% of petroleum-product price increases’ inflationary effect is direct while roughly 46% comes indirectly through wider production-cost transmission across industrial sectors—an important distinction given Serbia’s relatively high energy intensity compared with many EU economies.

The central bank also warns that emerging-market economies—and especially energy importers—face greater vulnerability under prolonged energy-shock scenarios due to imported commodity inflation pressures alongside tighter global financing conditions and weaker European growth prospects.

Tone remains cautious rather than alarmist

Overall, the NBS keeps its assessment controlled rather than alarmist: it believes Serbia has sufficient institutional capacity, fiscal space and financial buffers to manage this shock cycle provided geopolitical escalation does not intensify substantially further. Still, it concludes that Serbia’s macroeconomic path for 2026–2027 is increasingly tied to three external variables—global energy prices, European demand conditions and geopolitical stability—which will shape both inflation outcomes beyond mid-2026 and how quickly growth can re-accelerate toward Expo-linked momentum.