Update: 13 February 2020
Our view on interest rates and foreign exchange rates:
A global economic environment with muted growth and inflation in a context of still elevated risks led major central banks to stick to their very accommodating monetary policies. Following the rate cuts in 2019, we expect the Fed to keep its policy rate constant this and next year. Since euro area inflation is expected to remain significantly below the ECB’s medium-term target and risk factors, such as trade conflicts, are still negatively impacting the momentum of European growth, the ECB will most likely also keep monetary policy very accommodative in the years to come.
Flight-to-quality and safe-haven effects, subdued European (core) inflation and, in particular, a dovish ECB will continue to limit the upward potential for longer-term interest rates and intra-EMU sovereign spreads.
The Czech National Bank (CNB) raised its policy rate to 2.25% at its policy meeting on 6 February 2020. This is consistent with the underlying strong dynamics of Czech inflation, which the CNB took into account in its decision.
Our view on economic growth:
After the global economic slowdown in 2019, 2020 started with a slightly more positive economic outlook. The euro-area economy is expected to recover gradually throughout this year. Very low unemployment rates combined with solid wage inflation are likely to continue underpinning private consumption as the main driver of economic growth. The main factors that could substantially impede European economic sentiment and growth remain the risk of further economic deglobalisation, including an escalation of trade conflicts, Brexit, political turmoil in some euro-area countries and geopolitical tensions. The spreading of the corona virus is expected to lower Chinese economic growth and to distort global supply channels, leading to temporarily lower growth in advanced economies too. However, the impact on the global economy is expected to be temporary and may be partly compensated later on in 2020.
At present, a number of items are considered to constitute the main challenges for the financial sector. These relate to recent macroeconomic and political developments, such as Brexit and trade conflicts, all of which affect global and European economies, including KBC’s home markets. Economic growth and interest rate forecasts have been lowered, making it increasingly likely that the low interest rate environment will persist for longer than originally anticipated. Regulatory and compliance risks (including anti-money laundering regulations and GDPR) 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-related risks are becoming increasingly prevalent. Finally, 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.
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.