Lloyds share price: to break the 100p resistance barrier?

Lloyds share price: rising interest rates

Lloyds’ mortgage book currently stands at £293.3 billion, having increased by £16 billion in 2021. With the ‘race for space’ still ongoing as the UK undergoes its remote working revolution, this could increase to over £300 billion by the end of Q2 2022.

And yesterday, the Bank of England increased the UK’s base interest rate for a third consecutive time, to 0.75%. With the Consumer Prices Index inflation rate at 5.5%, the Bank has thrown out its previous inflationary predictions, saying that it could now be ‘several percentage points’ higher than 7.25% later this year.

While the Bank remains powerless against the rising costs of imported energy and food, the pressure to continue to raise rates to stave off a wage-inflation spiral remains intense. Capital Economics Chief Economist Paul Dales believes the bank rate ‘will be increased to 1.00% in May and will reach 2.00% next year.’ Meanwhile, HSBC is predicting a rise to 1.25% as soon as August.

According to UK Finance, today’s rate increase alone will add £26 to an average UK tracker mortgage customer’s monthly repayment. If the bank rate reaches 1.5%, £129 would be added to the monthly bill.

Of course, with 74% of mortgage holders on fixed rate deals, the effect of rate rises will filter through the financial system slowly. But Lloyds knows this, forecasting that its return on tangible equity will rise to more than 10% by 2024, and 12% by 2026.

But rising interest rates also come with risks. According to the Office for National Statistics, the average UK house price now stands at £275,000, while the median pre-tax wage stands at £31,772pa.

With an escalating cost-of-living crisis, interest rate rises on bloated mortgage amounts could see households default on their debts, slide into negative equity, or lose their incomes in the event of a recession.

But historically, the Lloyds share price strongly tracks UK interest rates. Unlike its competitors, it has no international operations. In January 2008, the bank rate was at 5.5% but had been reduced to 0.5% by March 2009. It’s no coincidence that Lloyds has been a penny stock since.

However, before the financial crisis, the bank rate hovered around 5%, and the Lloyds share price was worth several times more than its current value.

And as the bank begins its £2 billion share buyback programme, the long-awaited recovery closer to pre-crash norms becomes ever more realistic.

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*Based on revenue excluding FX (published financial statements, June 2020).