Economic comment

Retail sales joined the set of disappointing February data, showing a decline of 0.5% y/y. The slowdown was seen in almost all categories. In part, this may have been a correction of the exceptionally strong January result. Given the still positive growth in real household income and the diminishing potential for further increases in the savings rate, we view the February reading as another random deviation from a moderately positive trend, which should be consistent with around 3% y/y growth in private consumption this year. Nevertheless, the data has intensified market expectations about the scale of possible rate cuts this year. (...)
 

February data on industrial and construction production and corporate sector wages came in below expectations. Industry showed a 2% y/y decline, construction slowed to zero y/y and the downward trend in wage growth brought it to 7.9% y/y. Employment growth remained at -0.9% y/y. PPI inflation, as expected, slipped deeper below zero. With the domestic economy in good shape, the prospect of increased defence spending in the EU and the implementation of RRP projects, the performance of domestic industry and construction should start to improve over the course of the year and wage pressures may intensify, slowing the deceleration in wage growth.

CPI in February reached 4.9% y/y, 0.4pp below 5.3% y/y expected by us and the market. Reweighing of the CPI basket brought January print down to 4.9% y/y from 5.3% y/y. It looks like the downward surprise in inflation is almost entirely the product of the annual revision of the weights system in CPI. According to our estimates, annual core inflation may slow to 3.6-3.7% in February, down from 3.8-3.9% in January. Because of the much lower starting point, we need to move down our CPI inflation trajectory, at least in the nearest months. At the moment we see CPI in March stable at 4.9% y/y, and this was supposed to be the 2025’s high. The lower than expected inflation at the start of the year is good news, which may intensify discussion in the MPC about the monetary easing. We still do not believe that the first rate cut is possible before the presidential elections and so we assume that it will take place in July.