UK banks were one of the winners from the Bank of England’s suggestion that interest rates would not be cut in the short term and would remain elevated even when reduced.
Although the BoE opened the door to rate cuts, it said it would driven by inflation and not cut rates until inflation was at acceptable levels.
Lloyds, Barclays and Natwest shares were up between 1.2% and 2.9% on Friday as investors assessed the implications of elevated interest rates on banking earnings.
In the last round of UK bank trading updates, the focus was on the outlook and forecasts of Net Interest Margins in the coming period. Net Interest Margins are a key profitability metric dictated by the Bank of England’s base rate.
When the banks released their Q3 trading updates last year, a consensus was building that major central banks would cut interest rates in early 2024. If they were to do so, it would weigh on Net Interest Margins and profitability, and this was factored into the sector’s outlook.
However, after the Federal Reserve and Bank of England kept rates on hold this week and signalled they would be cautious about lower borrowing costs, UK banks will clearly enjoy higher interest rates for longer than previously anticipated.
When banks report later this month, investors will be looking forward to slightly more upbeat Net Interest Margin outlooks than at the end of last year.
Couple this with resilience in the UK economy; the environment for UK banks is becoming more favourable than the gloomy scenarios forecast in 2023.
