Market outlook

Update: 7 August 2025

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 geopolitical risks which have increased significantly over the past few years (including the war in Ukraine, conflicts in the Middle East and trade wars as a consequence of US tariff policies). These risks result or may result in shocks for the global economic system (e.g., GDP and inflation) and the financial markets (including interest rates). European economies, including KBC’s home markets, are affected too, creating an uncertain business environment, including for financial institutions. Regulatory and compliance risks (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, including AI, 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 and geopolitical tensions in general have triggered an increase in attacks worldwide. 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 www.kbc.com.

Our view on economic growth

US economic activity rose by 0.7% (non-annualised) in the second quarter of 2025, compared to negative growth of -0.1% in the first quarter of 2025. The rebound was largely attributable to resilient consumer demand and net exports. As a result of recent US economic policy – specifically with respect to import tariffs – growth in the US is expected to slow down again and to stagnate in the third quarter, before moderately recovering.

Euro area growth in the second quarter amounted to 0.1%, after 0.6% had been recorded in the first quarter of 2025. Notwithstanding the US-EU tariff agreement of 27 July, uncertainty surrounding economic policy and trade relations are likely to keep economic growth in the euro area subdued in the next few quarters. Meanwhile, the medium-term growth outlook has improved somewhat on the back of expected defence spending and infrastructure investments.

Quarter-on-quarter growth in Belgium was 0.2% in the second quarter, markedly weaker than in the previous quarter. Relatively strong domestic demand still remains the most important contributor to economic growth. For the next few quarters, we expect growth to remain broadly in line with that of the euro area.

The Czech economy grew by 0.2% in the second quarter, down from the 0.7% recorded in the first quarter of 2025, due to a weak industrial recovery. Hungarian economic activity rebounded by 0.4% in the second quarter after a decline of 0.1% in the first quarter. In Bulgaria and Slovakia, second-quarter real GDP growth was relatively resilient at 0.5% and 0.3%, respectively.

The main risk to our short-term outlook for European growth is a further escalation of the ongoing global trade conflict. Of particular concern is the continued threat of new US policy actions (even after the US-EU tariff agreement) and EU countermeasures to this and to the potential trade diversion of Chinese export goods away from the US market towards the EU.

Our view on interest rates and foreign exchange rates

In the euro area, inflation hit 2.0% in July, with core inflation remaining steady at 2.3%. Disinflationary pressures exerted by lower energy prices, the negative demand shock caused by US trade tariffs and the strength of the euro are likely to persist in the coming months. In the US, both headline and core inflation picked up in June, increasing to 2.7% and 2.9%, respectively. US inflation is likely to increase further in the course of 2025, as a consequence of the import tariffs imposed by the government there.

The ECB continued its easing cycle and cut its deposit rate in January, March, April and June 2025 to its current level of 2.0%. We expect the ECB to cut rates one more time in September, followed by a period of unchanged policy rates.

The Fed kept its easing cycle on pause in the first half of the year amidst economic uncertainty, especially about the inflationary and growth impact of higher import tariffs. If its assessment of the impact of US economic policies allows, the Fed will resume its cautious easing path in the second half of 2025.

There has been a disconnect between 10-year bond yields in the US and Germany since the start of the year. This has been driven by several events. Firstly, a huge fiscal spending plan was passed in the German parliament covering defence spending and infrastructure investment, followed by the announcement of increased defence spending at EU level. This pushed up the 10-year German bond yield and caused the US-German 10-year spread to narrow to about 140 basis points. Next, the announcement of so-called reciprocal tariffs by the US on 2 April, which triggered fears of higher inflation and less and/or later monetary policy easing by the Fed, led to a sharp rise in US 10-year bond yields. Later, the rise also gradually started to reflect a more general risk aversion towards US assets, which was also fuelled by fears about central bank independence. The higher general risk aversion towards the US has been reflected in the sizeable depreciation of the US dollar since April.
The Czech National Bank (CNB) cut its policy rate by 25 basis points in both February and May 2025, which brought it to its current level of 3.50%. Only one additional interest rate cut in the last quarter of 2025 is expected as elevated momentum in service inflation remains a source of concern for the CNB. We expect the Czech koruna to gradually appreciate against the euro towards the end of 2025.

The Hungarian central bank has kept its policy rate unchanged at 6.5% since late 2024. With the CPI hovering around – but still above – the 3% target, the National Bank of Hungary will be careful not to lower its policy rate too quickly. We expect just one 25-basis-point cut this year, followed by two rate cuts in 2026 (by 75 basis points in total), which would take the base rate to 5.50%. The forint has strengthened since the beginning of the year, albeit with bumps along the way, such as when reciprocal tariffs were announced on 2 April. We expect the currency to moderately depreciate from its current levels by the end of 2025.

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