The Lloyds (LSE:LLOY) share price has been one of the outstanding performers in the FTSE 100 in 2025. Investors in the company’s shares can smile after its 76% rise year to date.
In fact, since the start of 2024, shares of the banking giant have increased by a very impressive 103%.
However, the question on most investors’ minds will be whether the firm can continue to achieve such excellent returns next year.
Read on to find out.
Lowering interest rates
It’s very important to understand the impact of interest rates on Lloyd’s business. As a bank, its income is heavily determined by the interest rate set by the Bank of England (BoE).
Between December 2021 and August 2023, the BoE consistently increased interest rates from 0.1% to a high of 5.25%. It then maintained this high for a year until August 2024.
This was very beneficial to Lloyds, as it allowed it to raise the interest rates it charged to consumers faster than it raised the costs of the deposits it holds. This gap, called the net interest margin, helped boost its profit.
However, we’re now in the middle of a rate-cutting environment by the BoE. Just last week (18 December), rates were cut again to 3.75%. More rate cuts are expected in 2026.
This has the opposite effect to interest rate rises, as it compresses the net interest margin made by the bank. Interest made on loans typically falls at a quicker rate than interest paid on deposits.
For this key reason, the Lloyds may not hit the same level of returns in 2026 that it has over the past couple of years.
Other factors to consider
Not all is about interest rates, though. There are plenty of reasons to like the bank. For example, it’s the largest retail bank and mortgage lender in the UK.
For those investors who are bullish on the UK economy, this could be a great thing. This is because it will translate into more demand for more of its services, which means the bank can accrue more fees.
But the opposite is also true. When economic times are tougher, consumers could cut back on spending, which could adversely impact the company’s earnings.
With higher taxes and cost-of-living pressures persisting, I believe we’re about to enter this kind of environment.
London property prices falling by 2.4% in the year to October is a strong indication of this. It means people are trying to sell their properties amid lower demand. As the largest mortgage lender in the country, this isn’t good news for Lloyds, and in turn, holders of Lloyds shares.
Prediction
The conditions for Lloyd’s shares to prosper have been present over the last couple of years. If the UK economy enters a period where it thrives, I would be very bullish on the company’s shares.
Unfortunately, I don’t believe that year will be 2026. Cost-of-living pressures are becoming tighter, combined with lower interest rates. These aren’t conditions for the bank to continue doing well in.
However, its shares aren’t expensive either. With a forward price-to-earnings ratio of 11.5, I think they will remain relatively stable in 2026, just not repeat the same feats from the last two years.
That’s why I think investors should consider holding, but not necessarily buying its shares.
