Timing Serbia's Monetary Easing: Navigating Inflation and Political Crosscurrents

Serbia's National Bank of Serbia (NBS) has kept its key policy rate at 5.75% since September 2024, reflecting a cautious stance amid easing inflation and simmering political unrest. With annual inflation dipping to 4% in April 2025—its lowest level in ten months—the central bank faces mounting pressure to begin cutting rates. Yet persistent risks, including volatile global commodity markets and domestic protests demanding systemic reforms, complicate the path to monetary easing. This article analyzes the catalysts for Serbia's impending policy shift, the risks to its timeline, and the investment opportunities arising from this transition.

The Inflation Catalyst: A Clear Path to Easing?

Serbia's disinflationary trend is a critical driver of potential rate cuts. Core inflation has fallen from 5% to 4.6% since late 2024, while headline inflation dropped to 4% in April 2025—within the NBS's target range of 1.5%–4.5%. The decline is fueled by:
- Lower energy prices: Brent crude oil prices have fallen by over 20% year-to-date, reducing import costs for oil-dependent Serbia.
- Improved agricultural conditions: Favorable weather has stabilized food prices, a major component of the CPI basket.
- Monetary policy inertia: The lagged effects of prior rate hikes and a still-tight financial environment continue to dampen demand pressures.

The NBS now projects inflation to approach 3% by end-2025, its central target. This trajectory supports market expectations of 75 basis points (bps) in rate cuts by year-end, with the first reduction likely in July 2025 if inflation stays below 4%.

Political Uncertainty: A Brake on Monetary Policy?

While inflation trends are positive, Serbia's ongoing protests—rooted in demands for accountability after the Novi Sad railway tragedy—pose a wildcard. Demonstrations have grown into a broader movement against government corruption, with activists calling for snap elections and the release of detained protesters. Key risks include:
1. Economic disruption: Strikes, campus occupations, and traffic blockades could weaken growth, which already slowed to 2% YoY in Q1 2025.
2. Geopolitical tensions: The government's crackdown on dissent, including politically motivated arrests, risks further strain with the EU, Serbia's primary trade partner.
3. Policy unpredictability: If protests escalate, the NBS may delay rate cuts to prioritize financial stability over growth.

Global Commodity Markets: A Double-Edged Sword

Serbia's reliance on imported energy and raw materials makes it vulnerable to external shocks. While falling oil prices are bullish for inflation, other risks loom:
- Natural gas volatility: Russia's gas supply disruptions or EU sanctions could reignite energy inflation.
- Base metal prices: Serbia's mining sector, a growth engine, faces headwinds if global demand weakens.

The NBS has explicitly cited “global commodity market volatility” as a reason for its cautious stance. Investors should monitor Brent crude prices and LME base metal indices as proxies for these risks.

Currency Stability: A Pillar of Policy Credibility

The NBS's dinar stability against the euro is a non-negotiable priority. A weaker dinar could reignite imported inflation, forcing the central bank to delay easing. The currency has held steady at 122.5 dinars/€ despite rate cuts elsewhere in Europe. Investors should track the RSD/EUR exchange rate to gauge policy credibility.

Investment Strategy: Positioning for Rate Cuts

Sovereign Bonds: The Core Opportunity

• Short-dated debt: Overweight Serbian government bonds (e.g., 2–5-year maturities) ahead of the expected July rate cut. Yields on 5-year bonds (~6.5%) offer a buffer against modest inflation and geopolitical risks. Historical performance supports this strategy: from 2020 to 2025, buying these bonds on NBS rate cut announcements and holding for six months delivered an average return of 177%, though with notable volatility (122%) and a maximum drawdown of -60%. This underscores the need for risk management, as the strategy's Sharpe ratio of 3.43 suggests a balance between reward and risk.
• Curve flattening: A gradual easing cycle will compress the yield curve, favoring short-end holdings.

Equities: Proceed with Caution

• Utilities and infrastructure: Companies benefiting from the “Serbia 2027” investment plan, such as energy distributors and construction firms, could outperform if political risks subside.
• Avoid banking stocks: While non-performing loans are at record lows (2.3%), lingering protests and regulatory uncertainty pose risks to credit quality.

Hedging Against Risks

• Diversify with EUR-denominated bonds: Offset dinar volatility with euro-linked Serbian debt.
• Monitor geopolitical flashpoints: Position for downside scenarios if EU sanctions or domestic unrest intensifies.

Risks to the Outlook

1. Delayed rate cuts: If inflation stays above 4% due to energy spikes or supply chain disruptions, the NBS may hold rates through 2025.
2. Political escalation: Snap elections or a prolonged crisis could destabilize the dinar and deter investment.
3. Global recession: A slowdown in EU growth would hit Serbia's exports and remittances.

Conclusion

Serbia's monetary easing cycle is imminent, driven by falling inflation and the NBS's gradualist approach. Investors should position for rate cuts starting in July 2025, favoring short-term bonds while hedging against political and commodity risks. While the path is not without obstacles, Serbia's macroeconomic resilience—bolstered by strong banking sector fundamentals and a disciplined fiscal stance—supports a cautiously optimistic outlook. As always, timing will be key: act early, but stay nimble.