As a Lloyds Banking Group (LSE: LLOY) shareholder, any month that brings gains makes me happy. And over January 2022, the Lloyds share price rose by 6.8%, to end the month at 51.05p.
I’d be delighted to see that gain every month. It would certainly get me back to break-even on the share price a lot sooner than I actually expect. But Lloyds shares have been showing continuing volatility, even as it looks like we’re heading towards the Covid-19 endgame.
It’s making me wonder why the Lloyds share price had a good month. But I’m also looking at what factors lie behind the stock’s longer-term performance, and pondering how they might pan out. I think perhaps the most-watched banking indicator at the moment is the interest rate.
Will the Bank of England raise interest rates again, when it next decides later this week? Throughout January, hopes have been growing for another 0.25% hike. That would take the base rate to 0.5%. It’s not a lot, but I’d see any upwards move as an indication of the likely future. And even modest rises can help banks in their business of lending money. The higher the rate, the bigger the margin available for lending profits.
Soaring inflation
The march of inflation helps, as it lies behind interest rates. We’ve had years of low inflation, even before the pandemic arrived. And the BoE’s target of 2% per year has been met with a lengthy spell of low interest rates. But inflation reached 5.4% in December, and some are predicting 6% by the summer.
So why aren’t interest rates being raised higher and faster? Well, we’re coming out of the pandemic recession, and this year’s high inflation looks likely to be a one-off. The interest rate is a relatively crude tool anyway, and any over-reaction might dampen our economic recovery. So I think that’s why interest rate rises have had a relatively muted effect on the Lloyds share price.
I suspect there’s some optimism ahead of Lloyds’ full-year results, due on 24 February. In a Q3 update in October, the bank told us it had “recorded a profit before tax of £5,103m compared to £620m in the same period in 2020, representing an increase of £4,483m, largely reflecting the improved economic outlook for the UK in the first nine months of 2021 compared to the deterioration assumed in 2020.”
Lloyds share price optimism
There are a couple of things to unpack there. Firstly, I don’t get too excited by what looks like a big jump when it’s from a very low base. And the base of 2020 was very low indeed. But I do still see cause for optimism. That level of pre-tax profit is right back up with pre-pandemic levels. It’s actually higher than the 2019 full-year figure, though below 2018.
So does that good nine months boost shareholders’ optimism? I does leave me feeling more upbeat. But with the Lloyds share price still depressed, why hasn’t it risen further this year? I can’t help feeling reduced dividends are part of it. I’ll be looking for dividend news when I see the full-year figures.