How will the NBS interest rate hike affect loan repayments and the Serbian dinar?

Nikolić, President of the NBS Council of Governors, told Serbian public broadcaster RTS, stressed that maintaining living standards in 2027 would depend largely on wages continuing to grow faster than inflation.

The NBS raised its key policy rate for the first time in two years following an acceleration in inflation in September and October. It also increased its deposit and lending facility rates.

"Interest rates on dinar loans will be somewhat higher. However, a 0.25 percentage point increase in the key policy rate is not something that will significantly burden borrowers or undermine their standard of living," Nikolić said.

He noted that inflationary pressures were also affecting Europe, where the European Central Bank had already raised interest rates twice, in June and September.

"The ECB is expected to raise its key rate by another 0.25 percentage points in December, for the third time, as inflation has already reached 4%. The National Bank of Serbia is monitoring these developments," he said.

According to Nikolić, borrowers with loans denominated in both dinars and euros may face slightly less favourable conditions, but there is no reason for serious concern.

What is driving inflation?

Explaining why annual inflation rose from 2.2% to 4.4% in just two months, Nikolić pointed to the low comparison base created by last year's restrictions on retail profit margins.

"Last year's regulation limiting retail margins had a significant effect on prices, which fell as a result. We are now comparing current prices with that unusually low base, which is pushing annual inflation higher," he explained.

The September increase had been anticipated, with inflation reaching 4.1%. However, monthly price growth in October was somewhat stronger than expected, pushing annual inflation to 4.4%.

Food, non-alcoholic beverages and petroleum products recorded the largest price increases, with fuel prices rising 19% year-on-year.

Because these products carry considerable weight in the consumer price index, their price increases had a significant impact on overall inflation.

Nikolić said inflation was now approaching the upper limit of the NBS target range of 4.5%, making the interest rate increase an expected response.

"The NBS had projected that inflation could approach the upper limit of the target range by the end of the year, although remaining slightly below it. It may now exceed that level somewhat, but this should not cause alarm," he said.

Wage growth must remain above inflation

Nikolić emphasised that wages had grown faster than inflation in recent years, resulting in real increases in purchasing power.

"Nominal wage growth has consistently exceeded inflation, allowing real living standards to improve. This is particularly evident when comparing wages with the cost of the consumer basket," he said.

He stressed that maintaining this trend in 2027 would be essential.

"If wages continue to rise faster than inflation next year, that will be sufficient to maintain the improvement in living standards we have seen," Nikolić explained.

New government and economic programme crucial for growth

Asked whether the NBS forecast of 4% GDP growth in 2027 was realistic, Nikolić said the recent increase in inflation was unlikely to significantly affect economic growth.

Instead, he argued that next year's performance would depend primarily on the momentum carried over from 2026 and, more importantly, on the new government's budget and economic programme.

"What will drive growth? What will economic activity be based on? What is the plan for public spending, and how will we maintain strong export performance?" he asked.

Nikolić stressed that preserving external financial stability was particularly important.

"If we lose balance-of-payments stability, we could face pressure on the exchange rate, which would then feed back into inflation," he warned.

He therefore called for the new government to be formed as soon as possible and to present a clear, consistent economic programme capable of restoring confidence among market participants.

Nikolić noted that Serbia's average annual economic growth since 2015 had been 3.1%, which he described as stronger than that of many European countries.

He argued that sustained economic growth was necessary to finance higher wages without generating additional inflationary pressures.

"Only through real economic growth can we finance the higher wages we want and ensure that they continue to rise faster than inflation," he said.

"The dinar is stable, citizens should not worry"

Discussing the dinar exchange rate and increased demand for foreign currency, Nikolić said years of relative exchange rate stability had strengthened public confidence in Serbia's currency.

"We had become so accustomed to stability that we practically stopped thinking about the dinar exchange rate. This was reflected in growing confidence in the currency and greater use of the dinar within the financial system," he explained.

However, he warned that recent developments could undermine that confidence.

"Unfortunately, that confidence may now be damaged. It is a high price we are paying," he said.

Nevertheless, Nikolić maintained that Serbia's economic fundamentals remained strong and that there was no immediate reason to fear significant exchange rate instability.

"As far as the exchange rate is concerned, citizens should not worry. The economy remains in good shape, at least according to the statistical indicators, which reflect the actual situation. Nothing has fundamentally deteriorated," he stated.

He pointed to export growth outpacing imports, a relatively low balance-of-payments deficit and substantial foreign exchange reserves as factors supporting the dinar.

The NBS could also intervene in the foreign exchange market using those reserves if necessary.

Nikolić concluded by stressing that economic stability depends not only on financial indicators but also on public expectations and confidence.

"Expectations and trust have a major influence on economic developments, particularly in the financial sector. If we fail to restore confidence quickly, we could face problems that nobody wants," he warned.