Market outlook

Update: 14 May 2020

 

Our view on interest rates and foreign exchange rates:

The coronavirus crisis is a major shock to the global economy. In this context, fiscal and monetary policy initiatives aim to mitigate the economic impact of the pandemic and to boost recovery. Wherever possible, interest rates were quickly lowered and massive amounts of liquidity injected into the financial markets, where the demand for cash surged due to uncertainty. Moreover, additional unconventional policy tools have been used by central banks seeking to ensure that additional debt can be created at reasonable interest rates. Monetary policy is expected to stay extremely accommodative in the future.

Long-term bond yields are expected to remain low in the US and the euro area throughout 2020 due to exceptionally expansionary monetary policy and safe-haven effects. Some normalisation will gradually occur, but that will depend on further developments in various areas, such as the coronavirus crisis, Brexit, the US-China trade war and the US presidential elections. Intra-EMU sovereign spreads are likely to remain low as the ECB is expected to be able to limit interest-rate differentials.

After raising its policy rate earlier this year, the Czech National Bank (CNB) again lowered its two-week repo rate in several steps from 2.25% to 0.25% in response to the coronavirus crisis. Some continued weakness in the CZK can be expected due to these changes in monetary policy and the general market turmoil surrounding emerging market currencies. The CNB has been legally enabled to rely on quantitative easing tools in case the economic situation necessitates such market interventions. Finally, the CNB is continuing to take a flexible approach to how financial institutions are to comply with their regulatory duties in order to reduce the regulatory burden and to create room for more flexible reactions to the challenging economic environment.

Our view on economic growth:

Economic growth in 2020 will move into negative territory in the euro area and the US as a consequence of demand- and supply-side disruptions triggered by the coronavirus crisis. However, we envisage a strong recovery in 2021, due to the fact that, rather than being a normal recession, the current economic situation is a temporary standstill brought about by virus containment measures. Once these measures are gradually lifted, economic activity is expected to gradually pick up again. Moreover, the recovery will be boosted by various policy initiatives to mitigate the economic damage. However, this scenario is subject to considerable uncertainty as risks remain tilted to the downside.

Main challenges:

At present, a number of items are considered to constitute the main challenges for the financial sector. These stem primarily from the impact of the coronavirus crisis on the global economy and, in particular, the financial sector (including credit, market and liquidity risks and the impact of persisting low interest rates on our results). These risks come on top of risks relating to macroeconomic and political developments, such as Brexit and trade conflicts, all of which affect global and European economies, including KBC’s home markets. Regulatory and compliance risks (including anti-money laundering regulations 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, while climate-related risks are becoming increasingly prevalent. 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.

 

 

 

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