Super Thursday is a phrase coined many years ago to reflect the excitement and volatility around a meeting from the Bank of England (BoE). These monthly meetings occur on a Thursday, with part of the interest in the decision around interest rates. The committee decide whether to raise, cut or leave rates the same. For banking stocks, these decisions are very significant for the future direction of the share price. So what could this Super Thursday offer up to investors?
Why things are finely balanced
Not every BoE meeting is dubbed as potentially being super. For much of this year, there wasn’t any real expectation for the bank to change the monetary policy choices. However, over the course of the summer, certain factors changed this. Two key ones were unemployment shrinking and inflation rising.
For example, back in April inflation was running at 1.5% YoY. The target for the central bank is 2%. Due to various factors, inflation has been moving higher. The latest reading came in at a whopping 4.2%. This can be counterbalanced by raising interest rates. In theory, this should help to stem rising prices by pushing down on demand.
Most people expected the BoE to raise rates last month, but the committee surprised most by choosing not to raise by 0.15%. Expectations now turn to Thursday, as the last opportunity to hike this year. However, since the last meeting the discovery and spread of Omicron has occurred. So it really is a Super Thursday decision as to if the bank will choose to hike rates or not.
Volatility in banking stocks
If we rewind to the November meeting, banking stocks such as Lloyds Banking Group, NatWest and Barclays had jumped leading up to it. This was partly from investors pricing in the rate hike.
Rate hikes are good for banking stocks. This is because it helps to increase the net interest margin. This margin is the difference between the rate it lends money out at versus the rate it pays on deposits. The higher the base rate, the larger this margin can be. That’s one reason why banks struggled last year when rates were suddenly cut.
In the aftermath of the November meeting, the three above stocks were the worst performers in the FTSE 100 that day. Lloyds share price fell 4.5% on the day as an example.
So what does Super Thursday have in store? Well if you believe that the BoE won’t raise rates, then a smart play would be to short banking stocks. However, it’s important to remember that shorting a stock carries unlimited potential losses.
From our point of view, we think Lloyds, NatWest and Barclays all offer good long-term value. Therefore, given our view of no hike on Thursday, we’d look to buy these banking stocks if we see a similar 4-5% drop. From there, we’d look to hold for the long-term within our portfolio.
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