Lloyds Banking Group‘s (LSE:LLOY) share price see-sawed following the Bank of England’s (BoE) assembly yesterday (6 February).

The FTSE 100 financial institution surged following the noon price announcement however sharply retraced shortly afterwards. In the long run, it rose on the day however market sentiment is clearly fragile.

I can’t say I’m stunned. There’s lots within the BoE’s price resolution and accompanying commentary that I really feel might spook traders.

Financial gloom

Earlier than we get to the rate of interest reduce and its implications for Lloyds, let’s take a look at the central financial institution’s newest development forecasts.

There’s no approach to paint this in a great way. The BoE’s newest estimates for Britain’s economic system are fairly grim.

The central financial institution now expects UK GDP to broaden simply 0.75% in 2025. That’s HALF the speed of development that had been predicted as not too long ago as November.

That wasn’t the BoE’s solely worrying prediction both. Elevating fears of dreaded ‘stagflation’, it estimated Shopper Value Inflation (CPI) will spike once more to three.7% in quarter three.

That’s up from 2.5% in December, and approaching double the BoE’s 2% goal.

A mixture of weak financial development and resurgent inflation might wreak havoc on Lloyds. In addition to impacting credit score demand, the Black Horse Financial institution might additionally face a major rise in mortgage impairments.

Lloyds’ is already struggling to generate gross sales development — certainly, internet earnings truly dropped 4% in quarter three, to £4.3bn. Issues might get a lot worse if the economic system cools once more.

Slashed rates of interest

There’s additionally the likelihood that rates of interest might plummet within the short-to-medium time period because the BoE tries to stimulate development.

Falling charges are a double-edged sword for banks. On the one hand, their financial advantages can enhance client demand. Particularly, they’ll result in a resurgence within the mortgage market, an space through which Lloyds is the clear market chief.

Nevertheless, decreased charges may also pull internet curiosity margins (NIMs) — the distinction between the curiosity banks cost debtors and what they pay savers — via the ground.

This key stage of profitability is already alarmingly skinny over at Lloyds. Within the third quarter its NIM was 2.94% and falling, down 19 foundation factors 12 months on 12 months.

Judging from this week’s assembly, BoE ratesetters have gotten rather more keen to chop charges than just some months in the past.

To the market’s shock, two members of the Financial Coverage Committee (MPC) voted for a half-a-percent price reduce, together with the beforehand hawkish Catherine Mann.

The opposite seven voted for a 0.25% discount, leading to that eventual reduce to 4.5%.

As I say, decrease rates of interest can have advantages in addition to drawbacks for Lloyds. However they clearly add one other layer of hazard.

A threat too far?

Some might argue that these hazards are baked into the low valuation Lloyds shares command. At 63p, they commerce on a ahead price-to-earnings (P/E) ratio of 9.1 occasions.

I’m not so positive, although. The dangers to the financial institution’s earnings are extreme. And particularly when one additionally considers different risks, like rising market competitors and a Monetary Conduct Authority (FCA) probe into automotive finance that will set off enormous monetary penalties.

Proper now, I’d reasonably seek for different low-cost UK shares to purchase.