Omicron triggers uncertainties

6th December, 2021

Investor sentiment was shaken during November by the discovery of the new “Omicron” Covid-19 variant in South Africa. The news sparked concerns over the outlook for the UK and global economic recovery, and also raised questions over the future path of UK monetary policy. The FTSE 100 Index and the FTSE 250 Index both fell by 2.5% over November.

The Bank of England (BoE) confounded expectations by leaving its base rate unchanged at 0.1% in November. BoE Governor Andrew Bailey described the verdict as a “close call”, with the members of the Monetary Policy Committee (MPC) voting by 7-2 in favour of leaving rates unchanged. Looking ahead, however, Governor Bailey suggested that a rate increase could take place “from now onwards”, so investors may approach the MPC’s next meeting in mid-December with some anticipation.

Rising prices for energy, fuel, and second-hand cars drove up the rate of consumer price inflation to its highest level in almost a decade during October. The Consumer Prices Index soared to 4.2% year on year during the month, compared with September’s rate of 3.1%, stoking anticipation for a rate increase in December. The BoE expects inflationary pressures to intensify, with consumer price inflation predicted to reach around 5% in April 2022, and Governor Bailey told the House of Commons Treasury Select Committee that he was “very uneasy about the inflation situation”.

Having expanded by 5.5% during the second quarter, the UK economy grew by only 1.3% during the third quarter, undermined by ongoing disruptions to supply chains. Although the EY Item Club cut its economic growth forecast for the UK this year from 7.6% to 6.9%, this would still represent the strongest annual growth since 1941.

Global dividends have staged a robust post-pandemic recovery, according to Janus Henderson’s Global Dividend Index, which reported an annualised underlying increase of 22% during the third quarter. The mining sector provided a boost for dividend payouts in the UK, which benefited from large payments from BHP – the world’s biggest dividend payer in 2021 – and Rio Tinto, as well as the reinstatement of dividends from the banking sector. On a headline basis, UK dividends rose by 88.6% year on year, with an underlying increase of 59.9%.

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