This year started out well for the Lloyds Bank (LSE: LLOY) share price. The FTSE 100 bank quickly rose above 50p, and stayed there until the last week of February. And then the stock market correction happened. By the first week of March, the stock had tumbled by over 20%. And so far, the Lloyds Bank share price has not recovered back up to 50p+ levels.
The reason for this is not hard to understand. The FTSE 100 index might be on the road to recovery after the Russia-Ukraine war shock, but it is yet to come back to its early February highs. This of course is reflected in its constituents’ performances as well. Like that of Lloyds Bank. In fact, especially the likes of banks, which are highly sensitive to economic developments.
The Lloyds Bank share price could rally on higher interest rates
And the war indeed has economic repercussions. Among many others, there is the threat of higher inflation. Just today, the Bank of England (BoE) has increased interest rates citing heightened concerns about price rises.
This is the third such move since December 2021, and from the looks of it, certainly not the last. It follows an interest rate hike by the US Federal Reserve yesterday, indicating that not just in the UK but in other parts of the world too, the price of borrowing money is increasing.
This development could really make the Lloyds Bank share price this year. Higher policy rates are a sign that banks’ lending rates can also increase.
Higher dividend yield possible
This in turn can increase the bank’s interest income, and improve both its share price and prospective dividends. The bank’s dividend yield has inched up to a pretty decent 4.1% recently, which is anyway higher than the 3.8% levels for the FTSE 100 as a whole.
It is still lower than its pre-pandemic yield though. If its dividend payouts increase on increased earnings, I reckon it could go back up to those levels too. Moreover, this alone could raise the bank’s share price back up to pre-pandemic levels.
Inflation’s negative impact
While there is a good chance of this scenario playing out, as an investor, I always like to look at what could go wrong as well. And given where inflation is right now, I believe there is a whole lot that could go wrong. Inflation was expected to average at 4% for the UK even before the war started. And now it is likely to be higher.
Essentially this means that growth could falter in 2022 as demand drops on higher prices. The UK economy has just recovered from the pandemic, and a drag on growth again is particularly disappointing. In specific, it could break the likes of Lloyds Bank share price, since the bank’s activities are closely linked to the economy.
For now though, I am cautiously optimistic. I have also bought the stock. But I would wait for the worst of the current crisis to play out before buying any more of it.
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Manika Premsingh owns Lloyds Bank. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.