The US Federal Reserve’s decision to hold its key monetary policy rate spells continued hardship for borrowers in the UAE eagerly awaiting relief from persistently high interest rates on loans and mortgages. With the UAE currency pegged to the dollar, prospects for rate reduction remain dim.
In line with the Fed’s stance, the Central Bank of the UAE (CBUAE) has opted to maintain its base rate for the Overnight Deposit Facility (ODF) at 5.40 percent, matching a 23-year high. Additionally, the CBUAE will uphold the interest rate for short-term liquidity borrowing at 50 basis points above the base rate for all standing credit facilities.
Consequently, borrowing costs for various personal finance products, encompassing loans, credit cards, mortgages, savings, and remittances, will persist at their current elevated levels.
Vijay Valecha, CIO at Century Financial, highlighted the US Federal Reserve’s decision to maintain its key monetary policy rate, marking the sixth consecutive instance of unchanged rates. Despite this, the Fed still anticipates at least one rate cut by year-end.
“The Federal Open Market Committee (FOMC) had previously signaled a steady rate within a range of 5.25 percent to 5.5 percent during its recent policy meeting. Given the pegging of the UAE dirham to the dollar, this decision carries significant implications for the UAE economy, implying stability in interest rates in the near future,” stated Valecha.
“This development bodes well for consumers and businesses in the UAE with loans or mortgages tied to variable rates, providing assurance of stability in their monthly payments. It’s anticipated that the Central Bank of the UAE will issue a formal statement in the coming days, aligning with the Fed’s policy,” Valecha added.
Analysts elucidated that due to the currency peg between the dollar and dirham, the UAE effectively adopts the monetary policy set by the Fed. A significant ramification of this peg is the constraint it places on the CBUAE’s ability to pursue independent monetary policy.
The currency peg obliges local interest rates to mirror those in the US, irrespective of any disparities in the economic outlooks of the two nations, analysts noted. They emphasized that the optimal monetary policy for the United States may not necessarily align with that of the UAE, especially considering that GDP growth in the UAE has substantially outpaced GDP growth in the US and is projected to continue doing so in the foreseeable future.
