BoE rate hikes could bring big breakout for UK banking stocks

As the Bank of England prepare to raise rates, UK banking stocks look primed to finally break higher from the post-2009 downtrend.

Weekend commentary from Bank of England (BoE) Governor Andrew Bailey served to highlight just how close we could be to a rate hike at Threadneedle Street. With markets now pricing in a 82% chance of a 25 basis point (bp) rate rise in November, markets are increasingly steadfast in their view that the BoE will move next month.

The impact of Bailey’s appearance can be seen below, with implied bp jumping spiking over the weekend.

However, perhaps more importantly, we are looking at a potential series of hikes rather than simply a one-off move in November. Instead, markets are expecting rates to get back above 1% by June 2022. That means the potential for five or six 25 bp hikes within the next six meetings. Quite whether that comes to fruition remains to be seen.

However, it does provide an intriguing proposition for banks, with margins expected to improve markedly over the year ahead. UK banks have typically underperformed their US counterparts over the years, yet a push towards higher rates from the BoE certainly does provide speculation over whether there is better value form UK financials.

Inflation will be a critical factor for the interest rate outlook, with the latest UK consumer price index (CPI) figure bringing a welcome decline for both headline and core CPI. The prospect of a protracted push higher in rates will be driven by continued above-target inflation, and thus any sign that CPI has topped out could weaken the case for multiple hikes.

Nonetheless, with the prices being driven by a host of factors such as hiring difficulties, supply-chain struggles, and soaring input prices, there is a good chance we could see further price gains as Christmas and the winter period exacerbate these already troubling issues.

The outlook for banks will also rely on the perspective for economic growth, with some speculating that the recent rise in inflation and supply chain issues could hinder economic growth. Nonetheless, much of that economic difficulty will likely take the form of businesses failing to fully seize the opportunity provided by rising consumer demand.

Looking at UK 10-year treasury yields, we can see that rising confidence in higher rates and economic stability has pushed yields higher despite market volatility. The chart also highlights how UK-focused banks typically move in tandem with yields.

This wider perspective also shows how the downward trajectory in yields has brought a similar inability to break higher for banking stocks, with the prices creating lower highs as yields do the same. The risk here is that we could yet see yields roll over to create another lower high before long, bringing banking stocks down with it.

However, with inflation soaring, there is a question over whether yields could overcome their 2018 peak if the BoE raise rates above 0.75% (13-year highs). Such a move could help lift banking stocks out of their long-term downtrend.


Q3 Earnings - 21 October

Barclays are the leader of the pack, with the bank breaking up through the 2019 swing high of £1.78 back in March. We have subsequently seen the price push up into a fresh four-year high today, with the price pushing back towards the crucial 2017 peak of £2.08. We are certainly building a story that tells us of the potential for this stock to finally reverse its 14-year downtrend.

NatWest Group

Q3 earnings – 29 October

NatWest have struggled since the 2008 selloff, with the price trending lower after a somewhat lackluster 2009 rebound. The continued creation of lower highs comes into question as we close in on the £2.53 level. A break up through that 2018 high ends the downtrend, signalling the potential for another bout of gains in the years ahead.

Lloyds Banking Group

Q3 IMS – 28 October

Lloyds also remains below its Covid-19 pre-pandemic levels, with the price yet to take on the 76.4% Fibonacci resistance level at 53p. However, we ultimately require a break up through 63p resistance to end this wider downtrend that has been play over the course of the past eight years. With the price taking on the 2021 high 50p coming back into play this week, a break up through that level should push us towards the next leg higher for this stock.

IGA, may distribute information/research produced by its respective foreign affiliates within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

The information/research herein is prepared by IG Asia Pte Ltd (IGA) and its foreign affiliated companies (collectively known as the IG Group) and is intended for general circulation only. It does not take into account the specific investment objectives, financial situation, or particular needs of any particular person. You should take into account your specific investment objectives, financial situation, and particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit.

Please see important Research Disclaimer.

Bank of England meeting

An in-depth look at the effects of the BoE’s interest rate announcement ahead of the next MPC meeting on 1 August 2019.

  • What was decided at the last BoE meeting?
  • How does the MPC influence inflation?
  • How might the pound be affected by the next meeting?

Live prices on most popular markets

  • Forex
  • Shares
  • Indices

Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 15 mins.


Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 20 mins.

The Momentum Report

Get the week’s momentum report sent directly to your inbox every Monday for FREE. The Week Ahead gives you a full calendar of upcoming key events to monitor in the coming week, as well as commentary and insight from our expert analysts on the major indices to watch.

For more info on how we might use your data, see our privacy notice and access policy and privacy webpage.

You might be interested in…

Find out what charges your trades could incur with our transparent fee structure.

Discover why so many clients choose us, and what makes us a world-leading provider of CFDs.

Stay on top of upcoming market-moving events with our customisable economic calendar.