The Lloyds (LSE:LLOY) share price hasn’t exactly been a stellar performer over the past decade. But looking at just the last 12 months, the stock has climbed over 40%.
A lot of this gain can be attributed to the group’s recovery from the Covid crash in March 2020. Yet despite this growth, the stock is still trading under its pre-pandemic price of 63p. However, some economic tailwinds might be about to change all that. Could the Lloyds share price double in 2022? Let’s explore.
Hooray for… inflation?
The word inflation has been prominent in many headlines over the past couple of months. And it’s understandable why. In November 2021, the Consumer Prices Index (CPI), which acts as a good indicator of inflation, rose by 5.1%! That’s the highest price increase in nearly a decade – September 2011, to be precise.
As a quick and simplified reminder, inflation causes prices of materials and, in turn, products to go up. That’s horrible news for consumers since it inflates the cost of living, thus reducing the value of any savings. But this could actually be fantastic news for Lloyds and its share price. Let me explain why.
Like any bank, Lloyds makes a good chunk of its money by issuing loans to businesses and individuals. The most common type for the latter group would be a mortgage. The company then charges interest on these loans to generate a profit as well as mitigate potential default risks.
During times of high inflation, the Bank of England can increase interest rates. And suddenly everyone with a variable-rate mortgage starts paying higher monthly premiums. This reduces the total money in circulation, bringing inflation back down.
While paying higher interest, again, sucks for consumers and businesses alike, it’s music to the ears of banks like Lloyds. After all, if the firm can charge higher rates on its loans, Lloyds’ profit margins get that much wider, boosting its share price. But will it be enough to double it?
Taking a step back
With interest rates at record lows for nearly a decade, the banking sector hasn’t exactly been a stellar performer. That’s primarily why the Lloyds share price has struggled to deliver more than mediocre returns for investors during this period. The incoming interest rate boost to tackle inflation could be a catalyst to change that.
However, this may not last very long. There remains the possibility the inflation we’re currently experiencing is only temporary triggered by issued stimulus cheques and supply chain disruptions. The former has largely run out, and the latter will naturally be resolved as the pandemic slowly ends, although Brexit remains an issue.
If inflation subsides but the economy still falters, interest rate hikes may only be temporary. That could reverse the gains in the share price.
Can the Lloyds share price double?
Only time will tell whether the stock can deliver a 100% return for investors in 2022. Personally, I think inflation will provide a respectable boost, but it may not be enough. Having said that, Lloyds does have other growth levers to pull that could further increase profits and, in turn, the share price.
All things considered, I think the stock definitely has the potential to double, but it may take longer than a year to do so. As such, I’m not interested in adding it to my portfolio today since I believe there are better growth opportunities to be found elsewhere.
Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
