Bank of England (BoE) Governor Mark Carney might be signing off soon, but it will be an exit to remember. Yesterday, the BoE cut the bank rate by 0.5 percentage points to 0.25%. The last time it cut rates this much was in March 2009. That was the last of a series of cuts aimed at containing the spread of the financial crisis that started in September 2008.
At any other time, a sharp interest rate cut would bode well for banks because it can provide a boost to the economy by providing loans on easier terms. It looks like markets doubt this will happen this time, as is evident from the fact that the Lloyds Bank (LSE: LLOY) share price didn’t rise at all following the announcement.
Economic growth to remain weak
The reasons aren’t hard to determine. Citing forecasts from the Office for Budget Responsibility (OBR), Chancellor of the Exchequer Rishi Sunak’s maiden budget, also presented yesterday, said that the UK’s economic growth rate will be at 1.1% in 2020. This is disappointing because it’s is the lowest growth since 2009. And this is without taking COVID-19’s spread into account. This means that the economy could actually perform worse than it did even in 2009 if the coronavirus spreads further.
But that probably wouldn’t be a surprise to anyone who’s been watching the growth numbers. Yesterday was crowded with economic data and events, since the Office of National Statistics (ONS) also released the latest GDP numbers for the UK. These were disappointing too. GDP showed no growth in January, 2020, after showing a 0.3% increase the month before.
It also continued to be flat on a rolling quarterly basis (November 2019–January 2020), much like in the last quarter. The latest GDP print was a crucial one to assess if the election results had a positive impact on the economy. If it’s the case, it has not shown up yet. And with the latest coronavirus challenge, it might get dented in the near future too.
Lloyds Bank is economy-sensitive
A bank like Lloyds is more vulnerable than some of its more globalised counterparts to the UK economy’s fortunes. The blow can be softened with Threadneedle Street’s rate cut. The budget’s commitment to huge infrastructure spending over the next five years can also buoy the flagging economy. But it can take time before the impact of these measures shows up.
Also, their effectiveness will depend on the extent of drag from COVID-19. In the meantime, I reckon the LLOY share price will continue to move in tandem with broader markets. When I wrote about it two weeks ago, the prospect of an economic recovery suggested that it could potentially be a growth investment in the future. I’m less sure of that now.
It does continue to look like a good investment for income investors, however. At 7.9% its dividend yield is quite attractive. But I’d consider other stocks as well. I’m more bearish on banking stocks than others, now that we actually have a market crash at hand.
