At the start of 2021, the Lloyds (LSE: LLOY) share price seemed to be gaining momentum. However, peaking in June at just under 50p, the share price has since dropped over 12%. Lloyds has delivered a stellar 62% year-on-year return, but can pit regain this trajectory in the future?
UK economy and housing
Lloyds is a British retail and commercial bank. It doesn’t operate overseas and doesn’t have an investment banking arm. This makes the firm heavily reliant on the UK economy. As my fellow Fool Roland Head pointed out, Lloyds is planning to enter the landlord market, building and renting out properties to the UK public. It’s already the UK’s largest mortgage lender so has experience in the housing market. And I expect the added revenue from rent to push up the Lloyds share price in the future. However, this move isn’t likely to provide an immediate boost for the bank.
Looking more broadly at the UK economy, it seems a rise in inflation could be on the horizon. Analysts from the National Institute of Economic and Social Research indicated that CPI could rise to 3.9% in early 2022. This is almost double the Bank of England’s target. If this is the case, we will likely see interest rate hikes, which could complement the Lloyds share price as banks will be able to charge higher rates for lending. Again, this factor is likely to be a longer-term benefit for the Lloyds share price, but the coming months may grant more clarity on CPI direction.
As Lloyds is so heavily reliant on the UK economy, it’s worth examining inflation forecasts further. In the US, Fed Chairman Jerome Powell has hinted he believes US inflation to be transitory. Most recent price gains have occurred in categories such as cars, flight tickets, and hotel rooms. This is to be expected as the economy reopens after the pandemic. Therefore, it could be rational to assume that any UK inflation concerns may also be short term, which may limit growth in the Lloyds share price beyond 2022.
That said, Michael Sanders of the Monetary Policy Committee (MPC) alluded to a tapering of Quantitative Easing (QE) in July. QE is the purchase of government bonds by banks to create new money in the economy. This signifies longer-term inflation for the UK economy, which could be good news for the Lloyds share price.
Lloyds share price: my verdict
I think the biggest factor for the Lloyds share price moving forward will be how inflation pans out. At the moment, there seems to be no clear-cut direction for future interest rates. I will be closely monitoring the MPC and Fed announcements over the next few months before considering purchasing any UK bank shares.
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Dylan Hood has no position in Lloyds Banking Group. 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.