Retail performance remains strong in CEE, but varies significantly

On the radar

• Czech central bank lowered the key policy rate to 3.75% on Thursday.

• Inflation rate in Slovenia arrived at 2.0% y/y in January.

• Trade deficit reached EUR -700.6 million in Slovakia while industrial output contracted by -0.1% y/y in December.

• Croatia will publish trade data at 11 AM CET.

Economic developments

Several CEE countries have released December's retail sales growth over the last couple of days. The retail sector proved to be very strong in Czechia, Romania, and Slovakia (6.2% y/y, 7.8% y/y, and 10.1% y/y growth, respectively), while in Hungary, the retail sector barely expanded (0.1% y/y growth in December). Prior to these releases, we saw retail sales growth in Croatia, Poland, and Serbia. In Croatia, retail trade maintained a positive footprint as the headline figure growth remained strong at 6.5% y/y in December, while in Poland and Serbia, growth dynamics were much weaker (1.9% y/y and 0.8% y/y, respectively). On the one hand, a strong labor market and solid growth of nominal wages support a high level of spending. However, consumer confidence (which visibly correlates with retail sales growth) has been easing. At this point, we expect private consumption growth in 2025 to be comparable to 2024 developments.

Market movements

In line with expectations, the CNB reduced interest rates at its meeting today, bringing the main rate to 3.75%. The decision was unanimous, with all seven board members voting for a 25-basis-point cut. The rate reduction aligns with the current macroeconomic data as inflation remains within the upper half of the tolerance band around the inflation target, and its outlook does not suggest a significant increase in inflationary pressures. For the remainder of this year, we expect two more CNB rate cuts (in August and November) and an additional one next year. In Poland, Governor Glapinski reiterated that he sees no reason to change the policy rate at the moment as inflation remains elevated. He also welcomes the EURPLN development (at 4.19 on Friday morning) and expects the strength of the Polish zloty to be anti-inflationary. In fact, all CEE currencies have been strengthening lately (EURHUF moved visibly down to 404 as well), and long-term yields keep declining.

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