Market outlook

Update: 12 May 2022

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 impact of the war in Ukraine, not just directly, but even more so indirectly due to the resulting increase in energy and commodity prices and supply-side shortages, which were already stressed following the coronavirus pandemic. This has led to a surge in inflation, resulting in upward pressure on interest rates, volatility on financial markets, lower growth prospects and some concerns on the creditworthiness of counterparties in the economic sectors most exposed. These risks affect global, but especially, European economies, including KBC’s home markets. Regulatory and compliance risks (including capital requirements, anti-money laundering regulations and GDPR) 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-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. The war in Ukraine has again increased vigilance in this area.

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

After recording exceptionally strong, quarter-on-quarter real GDP growth of 1.7% in the fourth quarter of 2021, the US economy unexpectedly contracted (by -0.4% quarter-on-quarter) in the first quarter of 2022. In particular, disappointing figures for (gross) exports weighed on the US economy. Meanwhile, the euro area’s quarter-on-quarter growth rate slowed slightly to 0.2%. First-quarter economic growth also slowed marginally to 0.3% in Belgium and to 0.7% in the Czech Republic. For the second quarter of 2022, we expect the war in Ukraine to impact the European economy more severely than its US counterpart. Therefore, in the second quarter, an economic stagnation in the euro area cannot be excluded. 

The most important risk to our short-term growth outlook relates to the economic repercussions of the Russian invasion of Ukraine. Persistently higher prices of energy and commodities in general can lead to an even stronger price shock and weigh even more on private consumption and business activity than currently anticipated. This risk also includes near-term tightening of new and already existing bottlenecks and disruptions in production and supply chains. Moreover, pandemic-related risks to economic activity have, for now, not permanently disappeared and may reappear in the course of 2022, as is currently the case in the Chinese economy. Lastly, the global built-up of debt creates vulnerabilities, especially now that financing conditions are being supported less by accommodative monetary policy.

Our view on interest rates and foreign exchange rates

In March 2022, the Fed ended its net asset purchases and raised its policy rate by 25 basis points, and another 50 basis points early May, against the background of mounting inflationary pressure. We expect the Fed to continue to raise its policy rate in the coming quarters. In addition, the run-down of the Fed’s balance sheet is about to start, possibly as soon as in the second quarter. Meanwhile, the ECB suspended its net purchases under its Pandemic Emergency Purchase Programme (PEPP) in March 2022. Net purchases under its general Asset Purchase Programme (APP) are likely to end in the third quarter, followed by a first increase of 25 basis points in the ECB’s deposit rate in September and by further rate hikes at subsequent meetings. 

Both US and German 10-year yields rose during the first quarter, driven primarily by market expectations of monetary policy normalisation. The euro depreciated markedly against the US dollar during the first quarter. The weakening of the euro is partly the result of widening interest rate differentials between the euro area and the US, as well as the fact that the European economy is more severely affected by the war in Ukraine. We expect the euro to bottom out and gradually recover against the US dollar.

The Czech koruna (CZK) appreciated during the first quarter and continued to appreciate at the beginning of the second quarter. However, there was a temporary depreciation at the start of March as a result of the Russian invasion of Ukraine. Temporary FX interventions on the part of the Czech National Bank (CNB) stabilised the CZK, and the subsequent recovery was underpinned by the CNB’s policy rate tightening. The CNB raised its two-week repo rate in two steps from 3.75% to 5% during the first quarter, followed by another increase by 75 basis points to 5.75% in the beginning of May. We expect one more rate hike in June, which is likely to mark the peak of the current tightening cycle. In line with the positive interest rate differential, we expect the CZK to continue appreciating against the euro in the coming quarters.    

On balance, the Hungarian forint (HUF) depreciated slightly against the euro during the first quarter. During this period, however, the HUF exchange rate has been quite volatile. The HUF depreciated sharply on the eve of the Russian invasion of Ukraine at the beginning of March. Its subsequent recovery was due mainly to increased interest rate differentials with the euro area, which we expect to persist for the remainder of 2022. The National Bank of Hungary raised its base rate from 2.40% at the start of the first quarter to 4.4% at the end of March. At the end of April, it raised its base rate further to 5.4% and more tightening is expected in the second quarter. 

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.