Inflation creates a different set of risks
Higher inflation is less straightforwardly positive for Lloyds.
On the one hand, persistent inflation can keep interest rates higher for longer, potentially supporting banking margins.
On the other, inflation squeezes household disposable income and can make it harder for borrowers to service mortgages and other loans. That matters for credit quality.
The latest UK CPI figures show the extent of the problem. Headline CPI reached 3.1% in August, while services inflation remained at 3.4% and core CPI at 2.6%. Transport inflation accelerated sharply, with motor fuel prices contributing heavily to the monthly increase.
The Bank of England said in September that it had so far seen little evidence of material second-round effects in wage and price-setting, but warned that the risk could increase if elevated energy prices persist.
For Lloyds, this creates a balancing act. Higher rates can support income, but an economy under pressure from elevated borrowing costs and rising household expenses can eventually produce higher arrears, weaker loan demand and greater impairment charges.
So far, credit quality has remained supportive. Lloyds reported an asset-quality ratio of 25 basis points in the first half, while describing credit performance as strong and stable.
For those wanting to understand how broader commodity trading trends in oil markets feed into inflation and ultimately into bank earnings, our educational resources cover the connections between energy prices and the wider economic backdrop.