Serbia: Growth firms, but the guard stays up

Serbia's cycle has firmed materially through H1, with 2Q26 at 3.8% (revised up from 3.6% flash), taking the H1 average to 3.5%, well above the 3% embedded in both the government budget. We raise FY26 real GDP to 3.4% (from 2.9% in June) and keep FY27 unchanged at 4.0%, with the Expo lift still the anchor for the second half of the forecast. Growth remains anchored in domestic demand.

The headline inflation picture has improved dramatically as CPI slid from 3.3% in April to 1.9% in July, the softest print since 2021 and near the lower edge of the tolerance band. Still, the improvement is narrower than headline suggests. The disinflation was driven largely by food (in y/y deflation on the exceptional 2026 harvest and the September 2025 margin-cap base) and by the retreat in fuel prices as the Middle East shock faded early in the summer. Core inflation has stayed sticky at 4.5%, right at the upper edge of the tolerance band, with services running well above target across housing, hospitality, health and recreation. We revise FY26 average CPI down to 3.1% (from 3.9%) and FY27 to 4.2% (from 4.5%), but the September base-effect step-up will mechanically lift headline back toward 4.0-4.5% through the winter.

That combination of strong growth, sticky core, and elevated real wages leaves the NBS with less monetary space than the headline collapse implies. We keep the key rate on hold at 5.75% through both 2026 and 2027, with the first cut not before 2028.

The spotlight in the near term will surely be hijacked by parliamentary elections which are scheduled for October 25th.

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