Lloyds higher as Bank acts to curb inflation

Moves by central banks to curb inflation pleased markets today, with Lloyds and tech stocks higher.

A belated rates hike by the Bank of England and clarity from the US Federal Reserve eased inflation jitters today as shares in Lloyds Banking Group (LSE:LLOY) and other lenders jumped 4%.

The renewed efforts by central bankers to contain the cost of living crisis appeared to please markets after the recent spike in consumer prices to 6.8% and 5.1% in the US and UK respectively.

Communications from the Federal Reserve have been particularly effective as it last night managed to signal the potential for three interest rate hikes over the next year without sending bond yields sharply higher or undermining stock market confidence.

As we reported yesterday, hawkish central banks represent the biggest fear of investors. And despite an eventful meeting where the Fed also set out plans to end its bond-buying programme by March, nothing came as a surprise to markets.

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While the economic impact of Omicron remains a big unknown, investors appeared to welcome having clearer guidance on the rates outlook at the start of 2022.

Investec economist Ellie Henderson said: “For now it seems that the Fed is set to press full steam ahead with tightening plans.

“However, the new Omicron Covid-19 variant does threaten to be a significant bump in the road not just for the Fed, but central banks heading towards policy normalisation worldwide.”

Tech stocks, whose appeal diminishes when yields and rates rise, performed well as the Nasdaq surged 2.2% and Tesla (NASDAQ:TSLA)-backer Scottish Mortgage Investment Trust (LSE:SMT) lifted 2% in London.

The upbeat mood spread to the banking sector this afternoon after the Bank of England's monetary policy committee (MPC) wrong-footed the City by announcing an 8-1 decision in favour of raising interest rates from their pandemic low of 0.1% to 0.25%. It makes the Bank the first of the world's major central banks to hike since the start of the Covid crisis.

The increase takes place despite there being no change to the Bank's bond buying programme and with its own economic forecasts pointing to a weaker than expected fourth quarter.

But the Bank's primary target is inflation, which it warns is likely to be near 5% over the winter and peak at around 6% in April as utility bills are increased. Inflation is expected to fall back over the second half of 2022, but with a tight labour market the risks of not acting today were too great for a central bank with a medium-term inflation target of 2%.

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Many in the City feel that the committee wasted valuable time by choosing last month to wait for December's post-furlough job market statistics. There's also frustration about inconsistent messaging, in contrast to the performance of Federal Reserve boss Jerome Powell.

Victoria Scholar, interactive investor's head of investment, said: “It was only a fortnight ago that Bank of England hawk Michael Saunders, who was one of just two MPC members to back a hike in November, suggested even he might pause on voting for a rate hike this month in light of the threat of Omicron.

“However today, many traders have been caught off guard with the unexpected hike.”

Sterling came off its low for the year to stand at 1.335 versus the US dollar, with markets now pricing in interest rates of between 1% and 1.25% within 12 months. The next MPC meeting takes place in February, when more should be known about economic disruption from Omicron.

The FTSE 100 index also consolidated earlier gains to stand 0.9% higher at 7,238.

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The decision brought some relief for investors in Britain's biggest lenders after a prolonged squeeze on margins caused by ultra-low interest rates.

Lloyds Banking Group shares rose 2p to 46.3p and NatWest (LSE:NWG), which is regarded as the most rate sensitive of the UK banks, lifted 6.6p to 224p. Both lenders, however, are still some way short of the levels seen prior to the Omicron stock market sell-off in late November.

This depressed performance comes despite some favourable broker comment backing the sector and its potential for dividend growth and buybacks.

Deutsche Bank said this month: “UK and Irish banks have some of the best revenue momentum in Europe due to rates — and we believe this should have a higher value over time.”

Barclays (LSE:BARC) shares lifted 6.5p to 182.9p and Standard Chartered (LSE:STAN) added 15p to 429p but higher borrowing costs caused shares in United Utilities (LSE:UU.) and National Grid (LSE:NG.) to fall 3%.