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2 reasons why the Lloyds share price could hit 55p by year-end

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The Lloyds Banking Group (LSE:LLOY) share price is currently trading just under 50p. It’s up 37% over the past year. However, this does take into account the strong rally as part of the wider FTSE 100 at the back end of last year. If I look at the Lloyds share price over the past six months, it’s only up 1%. In order to break above 50p and make a move to 55p before 2022, it needs something to happen. Here are two potential factors that I think could cause a shift higher.

A rate hike boost for Lloyds shares

The major thing that could cause a material move higher in the Lloyds share price is the Bank of England meeting on 16 December. It’s the last meeting of the year, and one that carries with it large expectations of an interest rate hike. The central bank was widely expected to raise rates at the meeting at the start of this month. In a surprise turn, the committee voted 7-2 not to raise rates at all.

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I wrote the day after about how this was the driver that knocked Lloyds shares down by 4.5%. It shows how sensitive the stock is to what happens regarding the policy on interest rates. 

The main issue behind this is the fact that Lloyds is a traditional retail bank. One of the key ways it makes money is in the difference between the rate it charges when it lends money out, in comparison to the rate it pays on deposits coming in. This is known as the net interest margin. So higher interest rates essentially allow the bank to make a larger margin.

If we see a rate increase in December, I think this could provide a booster to the Lloyds share price to get it to 55p or higher.

Economic data and Covid-19 figures

Another key driver for the Lloyds share price is the overall state of the UK economy. The correlation here is mainly down to the fact that Lloyds is a heavily retail-focused bank. This means that the success of the bank is largely dictated by how well the average person performs. If the average person has a job, spends frequently and has a mortgage, then the bank has multiple ways to generate revenue.

So far, the UK economy has been recovering from the impact of Covid-19. But we’re heading into winter, which could push the infection rate higher. Yet at the same time, recent comments from the Government have shown that there’s currently no desire for another lockdown, or for any change in plan on restrictions.

If this remains the case, and if we see hospitalisations and the death rate remaining low as we head to the end of the year, I think this would support the Lloyds share price. In terms of key economic data to watch out for, I’m keeping an eye out for the December unemployment and inflation figures.

Although I’m optimistic about the above points, I could be wrong. The main risk to my view on the Lloyds share price is if the Bank of England again disappoints and doesn’t hike rates. This, combined with Covid-19-driven restrictions, could see the stock nosedive.

Overall, I’m considering buying Lloyds shares as we head towards the end of the year.

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Jon Smith has no position in any share mentioned. 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.

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