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Market outlook

Update: 9 August 2018

Our view on interest rates and foreign exchange rates:

In line with its recent communication, we expect the ECB to taper its Asset Purchase Programmes after September 2018 and to end it in December 2018. The first step towards policy rate normalisation will only be taken well after the end of QE (quantitative easing), which is likely to be in the second half of 2019 at the earliest. In the meantime, we expect the Fed to carry out two more rate hikes in 2018 each time by 25 basis points. Consequently, we believe that the US dollar strength against the euro will continue in the short term, as it will benefit from short-term interest rate support arising from the persistent monetary policy divergence. Towards the end of 2018, however, the euro will probably start appreciating again. Given the low-inflation environment and still highly accommodating monetary policy of the ECB, German long-term bond yields are expected to rise only modestly in the period ahead. Unlike the dovish stance of the ECB, the Czech National Bank has been tightening its monetary policy during the past few months and is expected to continue doing so in 2018 given the buoyant Czech growth and inflation environment. We forecast one more rate hike for this year in the Czech Republic, which would bring the repo rate to 1.50% by the end of 2018. As a result, we expect the Czech currency to appreciate moderately to 25.50 Czech koruna per euro by the end of 2018.

Our view on economic growth:

The European economic environment remains attractive. Although growth has slowed down somewhat compared to 2017, it remains above trend. Growth has probably already peaked, but we are still optimistic about the years to come. Persistently decreasing unemployment rates, with even 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 growth driver. The main element that could impede European economic sentiment and growth remains the risk of further economic de-globalisation, including an escalation of trade conflicts.

Main challenges:

At present, a number of items are considered to constitute the main challenges for the financial sector. Regulatory uncertainty remains a dominant theme for the sector (even though the ‘Basel IV’ agreement in December 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 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.