Market outlook

Update: 9 November

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, reduced liquidity and volatility on financial markets, lower growth prospects (with the increased likelihood of a recession or stagflation scenario) and some concerns about 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. 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 are seeing governments across Europe either taking or contemplating 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 or loan repayment moratoria).  

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 two consecutive negative quarter-on-quarter growth rates, the US economy grew again in the third quarter by 0.6% quarter-on-quarter (non-annualised), due primarily to the positive contribution made by net exports. However, the next two quarters are expected to see a mild contraction of the economy, largely driven by ongoing high inflation and a further tightening of financial conditions as a result of the Fed’s monetary policy and the strong trade-weighted exchange rate of the US dollar. 

Meanwhile, after strong growth in the first two quarters of 2022, third-quarter growth in the euro area also remained positive (0.2% quarter-on quarter). Leading confidence indicators, however, suggest that the euro area economy entered a technical recession in the fourth quarter of 2022, with the economy expected to shrink in that quarter and the opening quarter of 2023 due to the impact of the energy crisis and the tightening financial conditions.

In the third quarter of 2022, economic growth in both Belgium and the Czech Republic was negative (-0.1% and -0.4% quarter-on-quarter, respectively). Both economies have likely entered a technical recession in the third quarter, with real GDP expected to shrink in the fourth quarter as well.

The most important risk to our short-term European growth outlook relates to critical energy deficits, caused by the possible inability of Europe to compensate a severe disruption of Russian gas supplies. Other risks continue to include general, post-pandemic supply chain disruptions, new waves of Covid infections and vulnerability caused by high levels of debt in what are tightening financing conditions worldwide.

Our view on interest rates and foreign exchange rates

To fight increasing inflationary pressure, the Fed continued to raise its policy rate in the third quarter by 75 basis points each at the end of July and September and by another 75 basis points in November to the current target range of 3.75%-4.00%, which is above the Fed’s own estimate of the longer-term neutral rate. We expect the Fed to continue raising its policy rate in the coming quarters. Moreover, the run-down of the Fed’s balance sheet (‘Quantitative Tightening’) has been fully phased in since September and is contributing to a tightening monetary policy stance. Meanwhile, the ECB also raised all of its policy rates at the end of July by 50 basis points and by 75 basis points each in mid-September and at the end of October. We expect the ECB to continue raising these rates and to start gradually running down its APP portfolio.

After an initial moderate and temporary fall in July on the back of recession trades, both US and German 10-year yields continued their synchronous upward trend from early August on, when markets became convinced that both the Fed and the ECB were fully determined to restore price stability. On balance, both US and German 10-year bond yields rose by about 100 basis points in the period between the beginning of the third quarter and mid-October.

During the third quarter, the euro (EUR) continued to depreciate against the US dollar (USD). This was mainly a reflection of the general strength of the USD against most other currencies, a situation driven by the Fed’s rate-hiking cycle. Specifically in terms of the EUR exchange rate, vulnerabilities to the ongoing energy crisis also played an important role. Since these factors are likely to persist in the coming quarters, we expect the EUR to depreciate further to around 0.95 USD per EUR before bottoming out and very gradually recovering.

The Czech koruna (CZK) remained quite volatile during the third quarter, fluctuating around its current value of 24.50 CZK per EUR in relatively wide bands. Targeted FX interventions by the Czech National Bank (CNB) supported the CZK’s exchange rate. The CNB left its policy rate unchanged at 7%, which we expect to be the peak level in the current tightening cycle. This may result in some additional weakening of the CZK against the EUR over the next few quarters, before it gradually starts appreciating again. Further targeted FX interventions by the CNB, if necessary, are expected to stabilise the CZK against the EUR in the coming quarters.

To address high inflation, the National Bank of Hungary (NBH) raised its base rate in four steps from 7.75% to the current level of 13%. The NBH indicated that this would be the end of its tightening cycle with respect to the base rate. During most of the third quarter, the exchange rate of the Hungarian forint (HUF) against the EUR was volatile but generally stable. However, since the second half of September, the HUF has sharply depreciated mainly because of market concerns about the impact of the energy crisis, in particular on the current account balance, and fears of a global economic recession. After the NBH introduced special interest rate measures targeting international investors, the HUF partially recovered. Nevertheless, it has still depreciated significantly against the EUR compared to the exchange rate at the beginning of 2022.

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.