The Bank of England’s monetary policy committee has raised the UK bank rate by 0.25% in three successive meetings, with further rises widely expected as it moves to combat sharply rising inflation. However, a change in tone at its March meeting suggests further rate rises are less certain than previously expected — could this limit the potential draw of Lloyds [LLOY.L] shares?
What’s happening with Lloyds’ share price?
Despite slipping 5.52% last week to close on Friday at 44.83p, Lloyds’ share price is marginally higher — by 0.54% — over the past month, and likewise is just about in the black over the previous 12 months, up 0.99%. It’s been a fairly volatile ride for investors though, with the shares climbing to a 52-week high at 56p on 17 January, before falling to a 52-week low of 38.1p on 7 March. With the shares down 10.18% year-to-date, what’s next for Lloyds?
Rate rises boost Lloyds shares’ appeal
Lloyds — along with meme stock AMC Entertainment [AMC], Russian gold miner Polymetal [POLY] and Legal & General [LGEN] — was one of the most popular stocks over the past month among private investors. For financial services firms in particular, the multiple recent hikes in the UK’s interest rate have boosted these stocks’ appeal to investors.
“The popularity of L&G and Lloyds demonstrate the draw of financial services companies to retail investors in the current economic climate,” said Freetrade’s head of equity research, Paul Allison. He added: “Both stocks offer attractive dividend yields and with the current interest rate environment helping their profits, current prospects for further payouts look good.”
How does the Bank of England’s monetary policy affect Lloyds?
Despite households facing soaring energy bills, the Bank of England surprised analysts by a less hawkish tone last month, saying that “further modest tightening might be appropriate… depending on how medium-term prospects evolved”. According to CMC Markets’ chief market analyst Michael Hewson, this marked a “significant” change from February, when the MPC said further rate hikes were “likely to be appropriate”, with some forecasting rates rising to 2%, a further 1.25% from the current 0.75%.
The Bank’s deputy governor Jon Cunliffe actually voted for a rate hold, as a result of the hit households face, predominantly from higher commodity prices. The previous month, four policymakers pushed for a 50 basis point hike, but none did so in March, underlining the change of tone and a reflection of worries over the outlook for UK growth.
Should a less dovish central bank translate into fewer rate rises — or rates not going as high as 2% — this is likely to have an effect on Lloyds’ profit potential. Higher interest rates “should be a boon”, according to Seeking Alpha’s Mark Dockray, who reckons that “a 50bps parallel increase in rates [is] seen driving a circa £370m increase in net interest income (NII) in year one”.
It’s clear the prevailing economic uncertainty and escalating pressure on household income is a major concern for the UK’s central bank, and could curtail the extent to which it raises rates in an effort to combat inflation. In other words, the doubling of energy bills and other costs facing consumers, like rising petroI prices, could ultimately limit Lloyds’ earning potential from its NII. According to Seeking Alpha, NII “represents around 70% of the top line” of Lloyds’ income.
What are analysts saying about Lloyds stock?
The 19 analysts offering 12-month price targets for Lloyds Banking Group with the FT have a median target of 58p, with a high estimate of 88p and a low estimate of 44p. The median estimate represents a 29.38% increase from Friday’s close of 44.83p, suggesting further upside potential for Lloyds shares. This is supported by analysts’ recommendations with the FT, which show three ‘buy’, 12 ‘outperform’, six ‘hold’ and just three ‘underperform’ ratings, with an overall ‘outperform’ recommendation among 24 analysts.
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