Lloyds share price has remain subdued in the past week as investors prepare for the Bank of England’s interest rate decision.
Having previously rallied on expectations of a rate hike in December, the discovery of the Omicron variant has all but put pay to hopes of a rate hike this week.
This has caused negative price action in Lloyds shares as the prospect of higher rates is generally considered to provide a boost to banking profitability.
Lloyds shares are one of the most actively traded stocks on the London Stock Exchange and are a good bellwether for overall sentiment of equity traders.
With Lloyds shares falling into the announcement, it is clear equity markets are positioning for rates to be kept on hold, and a prolonged period of near-zero rates.
However, with UK inflation data soaring 5.1% in November, it really does put the Bank of England in a difficult position.
“The most interesting part of all of this is whether the Bank of England will raise rates this week on the back of this data. Having inflation running at 5.1% and interest rates at 0.1% doesn’t seem like the most sensible idea and people could make the case they are failing in achieving their mandate,” said Dan Boardman-Weston, CIO at BRI Wealth Management.
“The decision is finely balanced though as large parts of this inflationary pressure are outside of their control and moving rates higher won’t help. When this is coupled with the emergence of Omicron, the decision is on a knife edge. They may decide to hold fire until they have further clarity on the impact Omicron has on health and wealth.”
Analysts also questioned the overall strength of the UK economy and pointed to the robustness of recovery as a further headache for the BoE.
Faced with such a high inflation reading, coming in at 5.1% and with forecasts that the only way is up, the Bank of England would ordinarily be expected to call time on the cheap money party and raise interest rates. But here's why it's looking unlikely to happen tomorrow 👇— Susannah Streeter (@StreeterNews) December 15, 2021
Despite the drop going into the Bank of England meeting, the Lloyds share price is still up 23% YTD.