Market outlook

Update: 10 August 2023

Risk statement 

As we are mainly active in banking, insurance and asset management, we are exposed to a number of typical risks for these financial sectors such as – but not limited to – credit default risk, counterparty credit risk, concentration risk, movements in interest rates, currency risk, market risk, liquidity and funding risk, insurance underwriting risk, changes in regulations, operational risk, customer litigation, competition from other and new players, as well as the economy in general. KBC closely monitors and manages each of these risks within a strict risk framework, but they may all have a negative impact on asset values or could generate additional charges beyond anticipated levels.

At present, a number of factors are considered to constitute the main challenges for the financial sector. These stem primarily from the mostly indirect impact of the war in Ukraine, including the delayed effects of the increase in energy and commodity prices and the supply-side shortages it triggered. This has led to a surge in inflation, resulting in upward pressure on interest rates, lower growth prospects (or even fears of a recession) and some concerns about the creditworthiness of counterparties in the economic sectors most exposed. Geopolitical risks remain elevated, as evidenced by the conflict in Gaza/Israel. All these risks affect global, but especially, European economies, including KBC’s home markets. Rising interest rates were also the main source of some turmoil in the financial sector in the spring of 2023, although that has abated somewhat. Regulatory and compliance risks (including in relation to capital requirements, anti-money laundering regulations, GDPR and ESG/sustainability) also remain a dominant theme for the sector, as does enhanced consumer protection. Digitalisation (with technology as a catalyst) presents both opportunities and threats to the business model of traditional financial institutions, while climate and environmental-related risks are becoming increasingly prevalent. Cyber risk has become one of the main threats during the past few years, not just for the financial sector, but for the economy as a whole. The war in Ukraine has again increased vigilance in this area. Finally, we have seen governments across Europe taking additional measures to support their budgets (via increased tax contributions from the financial sector) and their citizens and corporate sector (by, for instance, implementing interest rate caps on loans or by pushing for higher rates on savings accounts).

We provide risk management data in our annual reports, quarterly reports and dedicated risk reports, all of which are available at

Our view on economic growth

The US economy expanded strongly in the third quarter by 1.2% (non-annualised). This was driven mainly by growth in private consumption, based on what is currently still robust net job creation. However, partly as a result of the cumulative impact of Fed tightening and the strike in the automotive industry, quarter-on-quarter growth is expected to slow to 0.1% in the fourth quarter of 2023 and -0.1% in the first quarter of 2024.

Growth in the euro area amounted to -0.1% in the third quarter. We expect growth in the euro area to stagnate for the remainder of 2023, due to the impact of the ECB’s tightening cycle on credit growth and the weakness in the manufacturing sector and increasingly in the service sector, too.

Third quarter-on-quarter growth in Belgium amounted to 0.5%. Relatively strong domestic demand (based on private consumption, investment and government spending) offset the continued weakness of net exports. For the remainder of 2023, we expect quarterly growth to remain broadly in line with that of the euro area. The Czech economy shrank by 0.3% in the third quarter of 2023 as a result of weakness in private consumption and in the manufacturing sector. We expect a return to modest positive quarter-on-quarter growth in the fourth quarter of 2023. Based on our latest estimates, quarterly growth for the third quarter in KBC’s other Central European home markets was clearly positive (Bulgaria 0.2%, Slovakia 0.5% and Hungary 1.2%). This positive dynamic is expected to continue in the fourth quarter of 2023, and persist in 2024.

The main risks to our short-term outlook for European growth include the current geopolitical tensions, with an upside risk for energy and commodity prices. The stronger-than expected persistence of underlying core inflation and the uncertainty regarding the impact of the ECB’s tightening cycle on the real economy are also playing a role. Additional risks include the increasing cost of financing high levels of sovereign debt in the euro area against a backdrop of tightened financing conditions and subdued economic growth.

Our view on interest rates and foreign exchange rates

The Fed’s latest policy rate hike (to a range of 5.25%-5.50% in early July) is expected to be the peak rate in this hiking cycle. However, the run-down of the Fed’s balance sheet (Quantitative Tightening) still contributes to the tightening of monetary policy. Meanwhile, the ECB raised its deposit rate to 4% in September 2023, which is also expected to be the peak in its rate-hiking cycle. Since July 2023, the ECB stopped the reinvestments of maturing assets from its Asset Purchase Programme (APP) portfolio, leading to a ‘passive’ run-down of this portfolio. Meanwhile, the flexible reinvestments of the ECB’s Pandemic Emergency Purchase Programme (PEPP) portfolio will continue until at least the end of 2024.

Both 10-year US and German government bond yields continued their sharp rise during the third quarter, from respectively about 3.80% and 2.40% at the beginning of the third quarter to about 4.80% and 2.80% in late October 2023. The significant increase in US yields (by about 100 basis points) compared to German yields (by about 40 basis points) means that the US-German yield spread has widened considerably from about 140 basis points at the beginning of the third quarter to about 200 basis points by late October 2023.

Short and long-term US-German interest-rate differentials led to a sharp appreciation of the US dollar against the euro from mid-July 2023 on. For the remainder of 2023, we expect the US dollar to remain strong against the euro. However, the euro is expected to gradually start appreciating again from early 2024 on.

Since the start of the third quarter, the Czech koruna (CZK) has continued to depreciate against the euro. This was driven by higher inflation and narrowing short-term interest rate differentials with the euro area, due to the fact that the ECB further raised its deposit rate while the Czech National Bank (CNB) kept its policy rate unchanged at 7%. Expected interest rate support for the CZK decreased further due to the prospect of the CNB carrying out a first rate cut in the fourth quarter of 2023. Moreover, the abandonment by the CNB of its commitment to intervene, if necessary, on the FX markets to support the exchange rate of the CZK weighed on the currency. We expect the weakness of the Koruna to persist in the short term.

During the third quarter, the National Bank of Hungary (NBH) eased its overnight rate further, reducing it to 13% in September 2023. Since the overnight rate was then in line with the base rate, it was abandoned and the base rate resumed its traditional role of policy rate. On 24 October, the NBH continued its rate-cutting cycle by lowering the base rate by 75 basis points to 12.25%. Depending on the extent that inflation further decreases, additional rate cuts are likely by the end of the year.

On balance, the exchange rate of the Hungarian forint against the euro has depreciated since the start of the third quarter. As in previous quarters, this exchange rate was quite volatile. Against the background of still high inflation differentials with the euro area and the NBH’s ongoing easing cycle, the forint is expected to remain weak (around current levels) for the remainder of 2023.


For more detailed analyses and data, please refer to KBC Economics

Disclaimer: the expectations, forecasts and statements regarding future are based on assumptions and assessments made when drawing up this text. By their nature, forward-looking statements involve uncertainty. Various factors could cause actual results and developments to differ from the initial statements. Moreover, KBC does not undertake any obligation to update the text in line with new developments.