Lloyds Banking Group has set aside £377m to cover a possible increase in loan defaults as interest rates rise in the tough economy.

The bank, which includes Halifax in its stable of brands, revealed pre-tax profits of £3.7bn for the first six months of the year.

It was better than analysts had predicted but down from the £3.9bn achieved in the same period last year.

Since then, soaring inflation has taken hold and the Bank of England has raised Bank rate five successive times since last December in a bid to tackle elements of the surge in prices.

A consequence of that effort is higher borrowing costs.

Millions of mortgage customers were immediately hit, with those on tracker and standard variable rate deals seeing their payments rise sharply while those on fixed rates have also suffered at the end of their terms.

At the same time there has been no let-up in inflation, which is currently at a 40-year high of 9.4% and predicted to breeze past 11% in the autumn exacerbating the cost of living crisis.

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The Bank said it was seeing increasing signs of customer caution but was yet to see a rise in borrowers falling behind with repayments.

Despite its provision for the growing threat of loan defaults, Lloyds raised its guidance for 2022 as a whole – thanks to rising rates.

It raised forecasts on a key measure of profitability, return on tangible equity, to 13% from the figure above 11% that was expected in March.

Chief executive Charlie Nunn told investors: “While the world has changed significantly since February, our strategic focus remains clear and disciplined.

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“Our strong financial performance demonstrates the resilience of our business model and customer relationships, and has enabled us to enhance guidance for 2022.

“Just as we remain well-placed to withstand the current macroeconomic uncertainty and continue to generate significant capital for our shareholders, so too do we remain committed to maintaining the support we give to our customers every day as they adapt to the challenges they face.”

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