CZ: Pro-inflationary developments in the retail sector continue

In October, real retail sales in the Czech Republic increased by 0.6% month-on-month. Today's figures slightly exceed our forecast, which anticipated a 0.3% m/m rise. The difference is largely due to revisions of historical data, with September's figures adjusted downward. Year-on-year growth reached 5.5%.

Overall, today's data (and revisions) do not alter the favorable trend in Czech retail. Sales growth is primarily driven by a recovery in household consumption, supported by declining inflation, rising real wages, and improved household sentiment.

Consumer sentiment increased again in November, marking the third consecutive month of improvement. Along with low inflation and favorable labor market conditions, this positive trend in the retail sector is expected to continue in the coming months. However, we anticipate inflation to rise slightly above 3% by the end of the year, which should slow down sales growth.

This year, retail sales are set to return to growth, likely exceeding 4% for the entire year. The favorable trend in retail sales is expected to persist in the Czech economy over the next two years, driven primarily by the recovery in household consumption. Although we anticipate a slight slowdown in growth from a medium-term perspective, the overall positive trend in the retail sector should continue. We anticipate retail sales growth to reach 4.4%, 3.3%, and 3.0% for the years 2024 through 2026, respectively.

The retail sector remains pro-inflationary, a trend likely to persist. From the CNB's perspective, maintaining caution continues to be prudent. We are not altering our forecast today and still see a slightly higher probability of keeping rates unchanged at the December meeting compared to a slight reduction. We currently anticipate the next CNB rate cut at the May meeting, while the market expects February.