Update: 14 February 2019
Our view on interest rates and foreign exchange rates:
Given the heightened downside risks to the outlook for the euro area economy, any significant tightening of ECB policy entailing an initial rate rise is still some time away. The ECB’s first step towards a normalisation of its policy rate will only be taken after the summer of 2019 at the earliest. Over the past few months, the outlook for the US economy has remained steady despite some rising risks. However, the combination of increased financial market volatility and the Fed’s more subdued outlook for headline inflation have made the case for a less aggressive Fed going forward. Given this shift in guidance, we now only expect one additional rate hike by the Fed in 2019. The short-term factors that supported the US dollar against the euro are waning now that the Fed has taken a more cautious stance. In the medium to long run, expectations of an ECB rate hike and the consequences of late-cyclical fiscal stimuli (twin deficits) in the US could lead to the euro appreciating.
Despite a still generally positive outlook for the global economy, uncertainty has increased about the economic conditions going forward. Investors continue to seek safe-haven assets, and long-term benchmark yields have fallen. With inflation expectations somewhat lower, safe haven trends persisting, and technical and policy factors at play that keep German bonds scarce, it is difficult to see a likely trigger for sharply increasing benchmark yields.
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 moderately by the end of 2019. We expect two more increases in the policy rate in the Czech Republic before the end of 2020.
Our view on economic growth:
European economic conditions are generally solid, although the growth peak is behind us. Decreasing unemployment rates and growing labour shortages in some European economies combined with gradually rising wage inflation, will continue to support private consumption. Moreover, also investments will remain an important driver of growth. The main elements 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, trade conflicts and the Italian budget, all of which impact the global and European economies, including KBC’s home markets. Economic growth and interest rate forecasts have been lowered, with a heightened risk that the low interest rate environment will persist for longer than anticipated. Regulatory risk remains 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.