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. 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 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 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

Following quarter-on-quarter growth of 0.5% (non-annualised) in the first quarter of 2023, the US economy also grew in the second quarter, expanding by 0.6% (non-annualised). This performance was mainly the result of solid investment and consumption growth based on the still robust labour market. As the cumulative monetary tightening of the Fed increasingly impacts the US economy, quarter-on-quarter growth is expected to slow to 0.1% and -0.1% in the third and fourth quarters, respectively.

Meanwhile, after stagnating in the first quarter of 2023, euro area growth turned positive again in the second quarter (0.3% quarter-on-quarter). We expect low GDP growth in the euro area to continue for the remainder of 2023, likely caused by the ECB’s tightening of monetary policy and the weakness in the global manufacturing sector.

In the second quarter of 2023, economic growth in Belgium was 0.2% quarter-on-quarter, still supported by the increase in private consumption. For the remainder of 2023, we expect quarterly growth to be in line with the growth dynamics of the euro area. After stagnating in the first quarter, the Czech economy grew by 0.1% in the second quarter of 2023, which marked the end of the technical recession during the second half of 2022.

The main risks to our short-term outlook for European growth include a weakening of global growth, the persistence of underlying core inflation (excluding food and energy), and the uncertainty regarding the timing and impact of the tightening of monetary policy by the ECB. Other risks relate to still elevated real estate valuations and high levels of debt in the context of tightened financing conditions.

Our view on interest rates and foreign exchange rates

After one rate hike of 25 basis points in the second quarter, the Fed resumed its hiking cycle by another 25 basis points in July, to a range of 5.25%-5.50%. We expect this to be the peak rate in this cycle, which will probably be maintained at least for the remainder of 2023. Moreover, the ongoing run-down of the Fed’s balance sheet (Quantitative Tightening) is contributing to a tight monetary policy stance. Meanwhile, the ECB too continued to raise all of its policy rates. After the latest hike in July, the ECB deposit rate now stands at 3.75%. We expect the ECB to raise its policy rate one more time (likely in September), reaching its cycle peak rate. From July 2023 on, the ECB stopped the reinvestments of maturing assets from its Asset Purchase Programme portfolio.

On balance, both 10-year US and German government bond yields rose during the second quarter mainly as a result of ongoing monetary tightening by the Fed and ECB. While the US 10-year yield rose to 3.8%, the German yield went up more modestly to 2.4%. Consequently, the US-German yield spread widened from about 120 to 145 basis points.

After a volatile second quarter, mostly driven by fluctuating market expectations about short-term interest rate differentials between the Fed and ECB policy rates, the exchange rate of the US dollar remained broadly unchanged against the euro. For the remainder of 2023, we expect the appreciating trend of the euro to gradually resume.
During the second quarter, the Czech koruna depreciated against the euro, primarily driven by higher inflation compared to the euro area. The positive interest differential in favour of the Czech Republic decreased somewhat, since the Czech National Bank (CNB) left its policy rate unchanged at 7%, while the ECB raised its deposit rate further to the current rate of 3.75%. Market expectations of a first rate cut by the CNB in the fourth quarter are likely to weaken the koruna further against the euro in the remainder of 2023.

To reduce the economic and fiscal cost of its high interest rate policy, that was aimed at bringing inflation back, the National Bank of Hungary (NBH) eased money market rates (3-month BUBOR) further during the second quarter from 16.3% to 15.2%. In July, it fell further towards 14% and is expected to reach the current level of the NBH’s base rate (13%) by the end of the third quarter. Meanwhile, the exchange rate of the Hungarian forint against the euro appreciated further during the second quarter, continuing the recovery from its weakness during the short-lived financial sector crisis in March. Against the background of still high inflation differentials with the euro area, the HUF is expected to depreciate slightly by the end 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.