The medium-term inflation projection (two years ahead) is of key importance in decision-making in the inflation targeting regime pursued by the NBS. As monetary policy impacts inflation with a time lag, the inflation targeting regime requires a projected inflation path.
The main tool for medium-term projections is a macroeconomic model, which is a set of equations describing the price-formation mechanism in Serbia and the channels of transmission of monetary policy to prices.
The NBS prepares the inflation projection four times a year, relying on new data and assessments of future macroeconomic trends. The GDP projection, inflation projection, the underlying assumptions and main risks are published in the Inflation Report.
The inflation projection relies on the assumption that monetary policy measures aim to keep inflation within the target tolerance band in the medium run, this being the primary role of monetary policy in the current regime.
The fan chart of the inflation projection is produced, showing the central projection and the range. The chart depicts different probabilities of the inflation outcome in the next eight quarters. The central projection is within the darkest central band and the probability that inflation will lie in it is 10%. Each following nuance also implies a 10% probability and the entire range covers a 90% probability that the projection will be achieved. In other words, the probability that inflation in the next eight quarters will lie outside the band in the chart is 10%.