Why has the Lloyds share price dropped 5% in the past month?
Clearly, the new Covid-19 variant has caused investors to reassess their views of a number of companies. Although it is too soon to know the full extent of the new variant’s impact, it now appears that additional containment measures are more likely than they were a month ago.
This could affect Lloyds to a significant extent. Investors may have been pricing in an interest rate rise at this month’s Bank of England’s Monetary Policy Committee (MPC) meeting. After all, inflation has risen to 4.2%. This is more than double the Bank of England’s target of 2%. It suggests that interest rate rises could be used to cool a rising price level.
However, the emergence of a new Covid-19 variant could prompt the Bank of England to adopt a ‘wait-and-see’ approach to interest rates. Since a higher interest rate would normally be expected to cool economic growth, they may wish to find out more about the potential impact of the new variant on the economy. Therefore, an interest rate rise in December may now be less likely than it was just a few weeks ago.
Interest rate levels affect the Lloyds share price because the bank’s profitability is closely linked to them. A higher interest rate generally equates to greater opportunity to generate higher profits via a higher net interest margin. Conversely, lower interest rates may mean less scope for rising profits.
As a result, the bank’s shares could prove to be relatively volatile in the short run. They may be impacted either positively or negatively by developments involving the new Covid-19 variant.
In the long run, the prospect of higher interest rates as the global economy recovers from the pandemic could catalyse Lloyds’ financial performance. Furthermore, its forward price-earnings ratio of 8 suggests that its share price contains a relatively wide margin of safety. This could mean that it offers capital growth potential over the coming years, albeit with higher volatility seemingly likely as the pandemic continues.
Not Investment Advice
Note: Views expressed are those of the writer. The author does not own any stocks mentioned. The article is information, not advice. Share prices can rise and fall. Past returns are not a guide to the future. Please do your own research.