CZ: Sales growth may moderate slightly this year

In December, real retail sales in the Czech Republic increased by 1.2% month-on-month. This data significantly exceeds both our expectations and market forecasts, which anticipated only a very slight increase in sales. Year-on-year, sales were up by 6.2%. There was also a slight revision of historical data. For the entire last year, sales increased by 4.6%.

Overall, today's data do not change our view of the retail sector's development. We continue to see its performance as favorable, driven primarily by the recovery in household consumption, supported by low inflation, favorable labor market conditions, and improved consumer sentiment.

Consumer sentiment slightly deteriorated in December and January, but overall it remains close to its long-term average. Therefore, a slight correction in sales volume (a month-on-month decline) cannot be ruled out for January, although year-on-year sales are expected to continue growing relatively strongly.

Growth in the retail sector is expected to continue this year and next. It will be driven primarily by household demand, while slightly elevated inflation, a moderation in wage growth, and a slight increase in the unemployment rate will exert downward pressure. Overall, we anticipate sales growth of 3.9% for this year and 3.7% for 2026.

Today's data confirm the pro-inflationary impact of the retail sector, but we do not expect a significant change in the CNB's future monetary policy. Similarly, we do not anticipate today's data to have a major impact on the koruna, which currently reflects uncertainty in the global economy.

The CNB meets tomorrow (February 6), and we expect a rate cut. This expectation is driven primarily by the unexpectedly low December inflation (-0.3% month-on-month compared to the expected +0.1%) and the continued weak macroeconomic performance in Germany. However, this is not certain, as the preliminary estimate of January inflation, due shortly before the CNB meeting, will likely be decisive.

For this year, we anticipate a total of three rate cuts (February, August, and November), followed by an additional cut next year. The CNB could thus stop at 3% (in terms of its key rate). We see risks as balanced. On one hand, the subdued developments in Germany could worsen further if a trade war between the US and the EU occurs, likely forcing the bank board to lower rates more quickly. On the other hand, a scenario where the CNB delivers an overall smaller rate cut and ends the gradual reduction at 3.25% or 3.50% cannot be ruled out. Some board members have previously indicated that they perceive the neutral rate to be above 3%, making this scenario plausible, in our view.