Central Bank of BiH Analysis: Inflationary Pressures Rising Due to Middle East Conflict and Energy Price Disruptions

(Patria) - Based on available official statistical data and information from international markets, published up to March 23, 2026, the Central Bank of Bosnia and Herzegovina (CBBH) estimates an annual real GDP growth in the fourth quarter of 2025 at 2.1%, which is identical to the flash estimate from December 2025. In the December round of flash estimates, the real GDP growth rate for the third quarter was estimated at 1.9%, and the subsequently published official figure was 2.1%. Despite significant revisions to official GDP data, our value estimates were largely aligned with the officially published data later on.

Economic activity in the last quarter of 2025 was mainly supported by domestic consumption growth, reflected in positive trends in trade and services, while industrial production continued its annual decline in activity until November. According to the current flash estimate, annual real GDP growth of 1.9% is expected for 2025, which is almost identical to the last projection (2.0%) from November, according to the medium-term macroeconomic projections model.

Our preliminary estimate for the intensity of real GDP growth in the first quarter of 2026 is 2.1% and is based on high-frequency data, mostly available only for January 2026. The outlook for this estimate is quite stable, while for the following quarters, we expect a significant strengthening of risks, primarily from the international environment. Consequently, a downward revision of the economic activity projection for 2026 is possible, with the spring round of medium-term macroeconomic projections.

We estimate total inflation in the first quarter of 2026 at 3.5%, and core inflation at 4.2%. In the first two months of the current year, an annual inflation rate of 3.4% and core inflation of 4.2% were recorded at the BiH level. Our preliminary estimate for total and core inflation in the second quarter of 2026 is 3.9% and 4.2%, based on currently available information. Based on the aforementioned quarterly estimates, we estimate total inflation at 3.7% and core inflation at 4.2% in the first half of 2026.

Inflation estimates for the first quarter of 2026 have been revised downwards by 29 basis points (from 3.8% to 3.5%) compared to the previous round of flash estimates. Although the inflation estimate has been reduced, domestic inflationary pressures remain significant. The revision of the estimate is partly due to the more intense growth of food prices in 2025 and their effect on the overall price index. Namely, food price growth recorded an increase of 4.3% in the first two months, indicating the persistence of inflationary pressures in this category, but significantly less than recorded in the previous year.

A significant increase in prices was recorded in the category Housing, water, electricity, gas and other fuels (7.7% in the first two months), with price growth significantly intensifying since October last year. According to official statistical data, prices in the Clothing and footwear category have been a constant deflationary factor in the structure of overall inflation for years.

At the end of February, the index was at the level of 38 (2015 = 100), indicating an annual price decrease in February, as well as for the period of the first two months of 2026, of 6.5%.

In the second quarter, we expect a strengthening of inflationary pressures, with total inflation potentially reaching around 3.9%, while core inflation could remain unchanged at 4.2% compared to the first quarter.

The current projected values reflect the strengthening of inflationary pressures in the country due to the spillover effect of price increases from the international environment. Pronounced risks from the international environment, particularly those related to the rise in energy prices and their spillover to the prices of other goods and services, represent a key factor that could influence the further dynamics of inflation and the possibility of upward revisions of inflation estimates as early as the next round. In this round, we assumed moderate nominal wage growth, without significant pressures that would substantially contribute to inflation in the short term.

Risks to the short-term economic growth and inflation outlook in BiH are pronounced after the US and Israel launched an attack on Iran at the end of February 2026, and are reflected primarily through rising energy prices, increased financial market volatility, and possible disruptions in global production and supply chains. In such circumstances, the achievement of previously projected economic growth and inflation rates becomes significantly more uncertain, with the certainty of their revision in both flash estimates for the short term and medium-term projections for the medium term.

The European Central Bank (ECB) published new macroeconomic projections for the Eurozone in March 2026. Inflation in the Eurozone for 2026 has been revised upwards to 2.6% (from the previous 1.9% in December 2025), primarily as a result of the energy shock from the Middle East. Also, the real GDP growth projection has been revised downwards to around 0.9% (from the previous 1.2% in December 2025), reflecting weaker economic activity and deteriorating economic conditions. The ECB's March 2026 projection revisions further confirm the unfavorable external environment, characterized by higher expected inflation and slower economic growth in the Eurozone, which represents an important channel for transmitting risks to economic activity and inflation in BiH.

The publication of the results of the next round of GDP flash estimates, as well as total and core inflation in the short term, is planned for June. Usual revisions of official quarterly data, which are particularly highlighted for the calculation of the deflator, can significantly affect flash estimates of real GDP.