Barclays, NatWest, Lloyds shares sit and wait for the BoE decision
British banks drifted upwards this week as the market waited for the upcoming Bank of England(BoE) decisions. NatWest share price jumped to a high of 230p, its highest point since October 18th. Similarly, Barclays rose to 151p while Lloyds Bank rose to 42.50p.
Lloyds Bank vs NatWest vs Barclays charts
Bank of England decision ahead
Copy link to sectionThis will be an important week for British banks as the BoE is set to deliver its first interest rate decision of the year. This meeting will set the tone for what to expect in the coming months. As the Federal Reserve did on Wednesday, economists believe that the BoE will maintain interest rates intact in this meeting.
In this case, the BoE will leave them unchanged at the 16-year high of 5.25% as its battle against inflation jumped. The BoE is in a more difficult place than the Fed because the British economy is ailing.
A report by the IMF noted that the UK will be the second-worst performer in the G7 this year after Germany. Another report showed that corporate bankruptcies surged to their highest level in over 30 years as the impact of high-interest rates rose.
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At the same time, inflation is still a thorn in the flesh of the Bank of England. The most recent data showed that the headline Consumer Price Index (CPI) surged to 4% in December, double its target point. Retail sales have also retreated.
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Therefore, a more hawkish tone will likely lead to more trouble for the British economy while a dovish one could spur inflation. In a note, analysts at ING said:
“The market may be far ahead, pricing already 115bp in cuts for this year starting as early as May and it may limit the further downside to rates, but the Bank’s evolution of language is a move in the dovish direction.”
Focus on British banks
Copy link to sectionBritish banks will likely react mildly to the actions by the Bank of England (BoE). These banks have already benefited from the bank’s hawkish tone, which has pushed their Net Interest Income (NII) to their highest levels in more than a decade.
However, higher interest rates have also had negative impacts on the companies. For one, many depositors have moved their money to money market funds, which are doing well. Many of them also withdrew the funds as the cost of living escalated.
Further, higher rates have led to more corporate and household delinquencies. For example, data shows that mortgage balances with arrears rose by 13% in the second quarter of the year.
Therefore, in my view, bank stocks will likely do well if the bank signals that it is done hiking interest rates in this meeting. A sign that it will cut later this year will also be a positive catalyst.
Still, these banks face numerous challenges ahead. Barclays is still seeing a slowdown in its investment banking business while Lloyds has opted to slash jobs in a bid to boost its income. NatWest is still dealing with last year’s Nigel Farage de-banking crisis.
Looking elsewhere, UK banks are lagging behind their European peers like Unicredit, Deutsche Bank, and Santander.
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