Will the Lloyds share price climb when interest rates rise?

Lloyds Banking Group (LSE: LLOY) was the most heavily traded stock by volume on the FTSE 100 early Tuesday. The balance of trades seemed pretty even though, with the Lloyds share price down 0.5% by mid-morning. That’s exactly in line with the index itself, amid growing indications of an early interest rate rise. Hmm. I wonder if that might be exactly what Lloyds shareholders need?

The Bank of England has kept interest rates down at 0.1% throughout the pandemic. But inflation is rising rapidly, And according to the The Telegraph, Monetary Policy Committee member Michael Saunders has spoken of a “significantly earlier” interest rate rise.

Many analysts are now expecting a rate hike by February 2022. And some suggest we could see it even before the end of 2021. What might this all mean for Lloyds, and for the other UK banks? Lloyds is in the business of making money by lending money. And low interest rates really don’t help. It’s not as if the pandemic is solely to blame either. No, since the financial crisis, and then Brexit, the UK economy has been limping along.

Down over two years

Low interest rates have been grinding on for years. And as we shareholders know only too well, the Lloyds share price has stuck steadfastly down there with them. Well, Lloyds shares are up 75% over the past 12 months, but that’s just a bit of post-lockdown recovery. Over two years, we’re still looking at a 20% drop. Barclays, meanwhile, has gained 22% over the same two years. Some of that underperformance will surely be down to Lloyds’ inward-looking UK focus.

There’s another side to interest rate rises and their possible effects on Lloyds. It’s the UK’s biggest mortgage lender, and rising interest rates aren’t exactly what house buyers want. So could we be heading into a weaker mortgage market in the coming year or so?

We also have the bank’s foray into the build-to-let business, in partnership with Barratt Developments. If the mortgage market should weaken in 2022, might the rental market strengthen to compensate? In reality, Lloyds’ new-build venture is relatively small. But I do like it as a way of expanding the bank’s exposure to different aspects of the property market.

Lloyds share price future?

I remain bullish on housing long term. Some bank investors might shy away from Lloyds because, well, building to rent is not what banks do, is it? And I expect that will be holding the Lloyds share price back. But I’m happy with the move, and I think it could help my Lloyds dividends beat inflation in the coming years.

Whether or not interest rate rises make any difference to Lloyds shares over the next year, they would help get us closer to long-term normality. I’d like to see inflation stable at around 1.8% per year, and interest rates stable with that as a target. And that, I think, would provide the best environment for Lloyds shareholders to prosper.

We’re surely not going to get there quickly. And I suspect we’ll see another year of ups and downs for the Lloyds share price. But I’m holding.

Alan Oscroft owns shares of Lloyds Banking Group. The Motley Fool UK has recommended Barclays and 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.