British banks to rake in £270m profit boost from Bank of England rate hike

The Bank of England’s widely anticipated interest rate rise will increase the profitability of the UK’s biggest banks by £274m in the next year, according to analysis to be published this morning.

Profits at the 24 biggest banks and building societies, which account for the vast majority of the British industry, will rise by 3.1 per cent in the coming 12 months if rates rise, according to analysis by consultancy Simon-Kucher.

Banks with large interest-free current account offerings will be the biggest beneficiaries, as they can charge more for variable interest loans immediately while not increasing pay-outs as quickly.

Royal Bank of Scotland, Barclays and Lloyds will be among the biggest winners, along with Santander and Nationwide, the research will find.

A rise in bank rate, the rate at which the Bank of England lends to commercial banks, should come as “tangible relief” for British banks, according to Ian Gordon, head of banks research at Investec.

Banks have long complained that historically low rates are harming their business, meaning that even a modest rise will be “meaningful”, said Gordon. A rate rise will be “more meaningful if you think there are plenty more rate rises to come”, he said, although most economists believe that to be unlikely within the next year.

The rate-setting monetary policy committee (MPC) is expected to be split today, whether it votes in favour of a hike or not, after two of nine members gave strong indications they believe it was premature to raise interest rates.

Peter Thorne, financials analyst at Charles Stanley, warned the hike could prove to be a “double-edged sword” for the banks, given the relative weakness of the UK economy.

“One has to ask what happens to loan growth and consumer confidence,” Thorne said.