Many market participants had thought that a rise in interest rates before the next general election, in just under one year’s time, was fairly likely, given the significant turnaround in outlook for the UK economy over the last year.
However, Bank of England Governor Mark Carney stated this week that he’s in no rush to raise interest rates, as he believes there’s still under-investment and excess capacity in the UK economy. This could be great news for RBS (LSE: RBS) (NYSE: RBS.US) — here’s why.
A Mixed 2014
The share price performance of RBS has been slightly disappointing in 2014, with shares in the part-nationalised bank being down 1% year-to-date, while the FTSE 100 is up around 2% over the same time period.
However, this performance may not tell the whole story, since low interest rates have helped to bolster the performance of the UK economy and to raise asset prices. This is good news for RBS, since its performance is closely linked to that of the UK economy and asset prices, with gains in the latter having the potential to improve the strength of its balance sheet. Clearly, a Bank of England Governor who is in no rush to raise rates could help to strengthen the performance — and financial standing — of RBS still further.
Lower Interest Rates, More Loans
With the UK economy continuing to improve, businesses and individuals are more likely to take out loans as their confidence picks up and risk aversion declines. A low interest rate acts as a turbo boost on this situation, with historically low interest rates encouraging people to borrow more. This is great news for RBS, since it receives a fee per loan but also the difference on the interest rate it pays on deposits versus the interest rate it charges on lending.
So, a larger volume and size of loanbook could be good news for RBS, since it should help the bank to move into profitability — which it is forecast to do this year — and a continued low interest rate should help to increase profits at a faster pace than if rates were higher.
Looking Ahead
As mentioned, RBS is forecast to go ‘back into the black’ in 2014 and, moreover, is expected to increase earnings by 12% in 2015. A Bank of England Governor who is in no rush to increase interest rates could help RBS to be more profitable, become financially stronger and to have a brighter future ahead of it.
