So how likely is a recession? It’s a difficult question to answer, but the latest ONS data on UK GDP growth reveals anaemic progress with a 0.2% expansion in July 2022. On the face of it, this is positive for Lloyds, but it could be a Catch-22 situation if tightening monetary policy raises the likelihood of a UK recession. The reasoning behind this is that they can increase the interest on loans they make. Rising interest rates are traditionally viewed as good news for banking shares. Some experts are predicting the base rate could almost treble to 6% next year. In addition to the Bank of England’s special operation in the gilts market, another consequence of the government’s new fiscal policies is the prospect of higher interest rates. Overall, a robust balance sheet should allow the bank to ride any potential short-term volatility that affects its mortgage-dominated loan book in my view. Nonetheless, taking a longer-term view, the UK has a persistent problem with housing supply, which acts as an ongoing tailwind. The bank’s net income would likely drop in the event households struggle to keep up with mortgage payments. This could spell trouble for Lloyds shares. Indeed, Halifax (which is part of Lloyds Banking Group), is among those making bearish calls. With hundreds of mortgage deals pulled from the market in recent weeks and the average five-year fixed-rate offer breaching 6%, many experts are beginning to take a gloomy view on the future for UK property. Kim Kinnaird, director at Halifax Mortgages The housing market may have already entered a more sustained period of slower growth.
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