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Market outlook

Update: 15 November 2018

Our view on interest rates and foreign exchange rates:

In line with its recent communication, we expect the ECB to end its Asset Purchase Programmes in December 2018. The first step towards policy rate normalisation will only be taken several months after the end of QE (quantitative easing), which is likely to be in September 2019. In the meantime, we expect the Fed to carry out one more rate hike this year while its balance sheet rundown continues as planned. We expect the Fed rate cycle to peak at 3.375% at the end of 2019. Consequently, we believe that the US dollar will continue strengthening against the euro in the short run, as it benefits from short-term interest rate support arising from persistent monetary policy divergence. On a somewhat longer-term horizon, however, the euro will probably start appreciating again. Despite the flight to quality and safe-haven effects, persistent excess liquidity, the sustained German budget surplus, relatively subdued European (core) inflation and still highly accommodating monetary policy of the ECB, German long-term bond yields are expected to rise in the period ahead, albeit only modestly. Unlike the dovish stance of the ECB, the Czech National Bank has been tightening its monetary policy in the light of a buoyant Czech growth and inflation environment. Given these favourable conditions, the Czech currency is expected to appreciate by the end of 2019. We expect two more increases in the policy rate before the end of 2020 in the Czech Republic.

Our view on economic growth:

European economic conditions remain attractive, although we believe that the growth peak is behind us. Persistently decreasing unemployment rates, with growing labour shortages even arising in some European economies, combined with gradually rising wage inflation will continue to support private consumption. Moreover, investments will remain an important driver of growth. The main elements that could impede European economic sentiment and growth remain the risk of further economic de-globalisation, including an escalation of trade conflicts, Brexit and political turmoil in Italy.

Main challenges:

At present, a number of items are considered to constitute the main challenges for the financial sector. Regulatory risk remains a dominant theme for the sector (even though the ‘Basel IV’ agreement in December 2017 has brought some clarification as regards future capital requirements), as does enhanced consumer protection. Another ongoing challenge remains the low interest rate environment, combined with the increased risk of asset bubbles. The financial sector also faces the potential systemic consequences of political and financial developments like Brexit, the Italian budget discussions or protectionist measures in the US, which will have an impact on the European economy. Technology used in the financial industry is an additional challenge for the business model of traditional financial institutions. 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 Economic Research & Analyses.

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