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Why is the Lloyds share price falling?

Image: Lloyds Banking Group

As June started, the Lloyds Bank (LSE: LLOY) share touched one-year highs of 50p. This was exactly in line with my expectations for the stock. Just a few weeks before this, I had said that it could touch these levels. In fact, I also said that it could now go up to 60p. 

However, no sooner did the Lloyds share price touch 50p than it started receding once again. It was down at yesterday’s close by 4% from these levels. At first glance, this is puzzling for two reasons. 

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One, the FTSE 100 index is actually marginally higher over this time. This means that Lloyds’ share price trend is not because of broader market weakness. Two, I did not find any updates for the company either that would explain the continued slide.

So what is going on here?

Banking set shows weakness

A look at the share prices of FTSE 100 banks shows a similar trend for them as well, save Natwest, which has shown a slight increase. But even Natwest is below the highs seen earlier this month. I suspect this sectoral trend too, is for two reasons. 

One, a full opening up of the UK economy has been extended by another month. This will tell on economic growth in 2021. There is no doubt that forecasters expect robust growth ahead, but I think it can get dented. Banks are closely linked to the economy, so I reckon they could be impacted too. 

Inflation can dampen growth

Two, even as we wait for recovery to truly kick in, inflation has started rising. The latest inflation numbers are at 2.1% for May, compared to the same month in the past year. This is higher than the Bank of England’s target level and also higher than economists’ expectations. 

Now, inflation in itself is not bad, it is even healthy because it indicates a growing economy. The problem comes when prices rise so fast that things become unaffordable for the consumer, simply put. The consumer stops buying, production falls and the economy slumps.

This is one reason why the BoE has an inflation target. And when inflation exceeds this target level, it means that prices are rising too fast to be good for the economy. It may encourage an increase in interest rates, but will also discourage loans from banks. I think inflation may be a reason for investor caution regarding bank stocks as well. 

My takeaway for the Lloyds share price

However, I am not entirely worried about the macroeconomy’s impact on banking. It looks more healthy than not, and there is a possibility that inflation is transitory

Further, the Lloyds Bank story remains unchanged. The bank is getting healthier. Even with some setback to potential economic growth, the next quarter can be expected to look better than the last one. And it is even likely that the BoE will allow banks to pay higher dividends soon enough. I maintain that the Lloyds share price can rise to 60p

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Manika Premsingh has no position in the shares 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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