Update: 8 August 2019
Our view on interest rates and foreign exchange rates:
A weaker economic outlook with elevated risks and below-target inflation levels have led to a shift in major central banks’ forward guidance towards additional or renewed monetary stimuli. Following the recent 25 basis points rate cut, we expect additional rate cuts by the Fed in the near future. Since euro area inflation will remain below the ECB’s medium-term target and risk factors such as trade conflicts are impacting European growth momentum, the ECB will most likely ease its policy stance going forward too. The expected additional ECB easing will come on top of the ongoing accommodative impact of the ECB’s ‘full reinvestment’ policy, which keeps its balance sheet at an elevated level.
Market expectations about additional monetary stimuli have been the driving force behind recent declines in long(er)-term interest rates. We view the recent rapid decline in long-term yields as a market reaction to the expectations on the pace of monetary easing. Therefore we expect the upward potential for longer-term interest rates to be limited.
The Czech National Bank has been tightening its monetary policy with a somewhat sooner-than-expected rate hike earlier this year (+25 basis points to 2% on 2 May). This reflected an environment of buoyant Czech growth and inflation. However, looser monetary policy abroad is also playing a role, as marked deviations from the ECB path have become less likely. Therefore, we expect the Czech National Bank to have a more accommodative policy in the coming years.
Our view on economic growth:
In line with global economic developments, the European economy is currently going through a slowdown. Decreasing unemployment rates and growing labour shortages in some European economies, combined with gradually rising wage inflation, may continue to support private consumption. Investment may also remain supportive for growth. The main factors that could substantially 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 some euro area countries.
At present, a number of items are considered to constitute the main challenges for the financial sector. These relate to recent macroeconomic and political developments, such as Brexit and trade conflicts, all of which affect global and European economies, including KBC’s home markets. Economic growth and interest rate forecasts have been lowered, making it increasingly likely that the low interest rate environment will persist for longer than anticipated. Regulatory and compliance risks (including anti-money laundering regulation and GDPR) 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. 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 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.