RBS, Lloyds Fall More Than 2% as BOE Opts for `Reluctant' Hike

(Bloomberg) -- Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc both fell more than 2 percent as the Bank of England signaled it won’t follow up on its first interest-rate hike in a decade anytime soon.

The two banks are widely seen as the most sensitive of the U.K.’s lenders to an increase in the Bank Rate, which officials raised by a quarter percentage point on Thursday to 0.5 percent. UBS Group AG, for example, estimates that a 1 percentage-point rate hike would translate to a 13 percent boost to RBS’s 2018 adjusted pretax profit.

But BOE Governor Mark Carney stressed that any further rate hikes are some way off, even as he justified the policy tightening by pointing to the fastest inflation in five years. Policy makers voted 7-2 to lift the benchmark rate, though the minutes of their meeting underscored worries about the fragility of the U.K.’s Brexit-hit economy.

It was “a very reluctant hike,” said Oliver Harvey, a London-based strategist at Deutsche Bank AG. “Interest rates will remain at these levels throughout next year due to a more pessimistic view on growth.”

RBS dropped as much as 2.3 percent and was down 1.1 percent at 281.40 pence as of 4:25 p.m. in London, while Lloyds fell 2.3 percent, before recovering to be 0.8 percent down on the day at 68.07 pence. Both sets of shares hit their lowest levels in about a week, even as the FTSE 100 Index rose.

After the BOE decision, RBS and Lloyds announced they’d raise their own base rates. RBS said it’s still considering if it will make changes to variable-rate mortgages, though Chief Executive Officer Ross McEwan has said that 88 percent of its mortgage costumers are on fixed-rate agreements. Lloyds said changes will apply from December.

U.K. bank bosses had been optimistic about the prospect of a small rate increase from the BOE because gradual tightening is expected to boost interest margins on loans while not being severe enough to trigger mortgage defaults.

To contact the reporter on this story: Stefania Spezzati in London at sspezzati@bloomberg.net.

To contact the editors responsible for this story: Ambereen Choudhury at achoudhury@bloomberg.net, Paul Armstrong, Jon Menon

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