Gulf News - Relief for UAE consumers: Loans stay affordable, no price hike as US Fed hits 'pause' on rate hike

Dubai: UAE consumers and businesses have got a break from paying extra on their loans with the US Federal Reserve not raising the interest at its meeting today (June 14).

This puts a pause on rate hikes after 10 increases since March 2022 – and which have been matched by the UAE Central Bank given the dirham’s peg to the dollar. In fact, the Fed had said it would ‘pause’ rate increases after its meeting in May (when it added a further 0.25 per cent increase to the base rate).

UAE based businesses had taken the Fed for its word and had been preparing for the pause. Appetite for bank loans remains strong among businesses and consumers, with the financials that will be put out by banks for the second quarter 2023 expected to reflect that.

As for UAE consumers, the Fed pause will mean they will not have to find ways to add a few more hundreds of dirhams to their loan exposures (and credit card bills). The next obvious question is when the Fed will make its first cuts to the rates, which are now at 5-5.25 per cent in the US.

In a statement, the Central Bank of the UAE confirmed it will maintain the base rate applicable to the Overnight Deposit Facility (ODF) at 5.15 per cent. "This decision was taken following the US Federal Reserve Board’s announcement on 14 June to keep the Interest on Reserve Balances (IORB) unchanged.

"The CBUAE also has decided to maintain the rate applicable to borrowing short-term liquidity from the CBUAE through all standing credit facilities at 50 basis points above the base rate."

Before that, however, the Fed has to give a clear statement whether there will be further hikes. The US monetary agency had been raising rates to tame inflation down to around 2 per cent. US inflation numbers for May suggest that the desired results are emerging.

Such clarity is needed from the Fed because the ‘previous rate hikes starting from March 2022 have had an impact on certain SMEs and borrowers in the UAE,” said Bal Krishen Chairman and CEO of Dubai-based Century Financial.

“They have had to navigate liquidity and debt repayment challenges. It's worth noting that the IMF has also revised GDP growth forecasts for the Gulf and MENA economies, adding further context to the Fed's decision (not to raise rates this month).”

Watch the space

But the Fed is not in the mood to give a clear answer on when they intend to pare down some of the increases since March 2022. Instead, the Fed on Wednesday said that it would not hesitate to raise rates further if the US inflation doesn't cool down to levels they deem fit.

"It is pretty much clear that the Fed wants to sit on the beach for the summer and let their hard labour do all the work," said Naeem Aslam, Chief Investment Officer at Zaye Capital Markets.

"Basically, all that hard labour is bearing fruit, and there is no need to intervene now. The reason that the (US stock) market is moving lower is that the Fed has indicated that more rates will come. But the fact is that if they really were unhappy with the inflation reading, we would have seen a reaction in terms of an interest rate hike.

"We believe that the Fed is playing it safe here, and they have balanced their action with the statement. It is likely that once the dust is fully settled, this equity market will begin to roar again, and we expect the Dollar Index to move lower."

UAE economy has the resilience

Business sources say the UAE economy continues to show resilience despite having to deal with the higher cost of operations. Leading corporates - Majid Al Futtaim Group - and banks - Commercial Bank of Dubai - have tapped the debt markets, and refinancing where possible.

"The ongoing rebound in the UAE’s key sectors will keep growth above historical trend during 2023," said Krishen. "It is expected that the activity in the wholesale and retail sector (26 per cent of total UAE GDP) will pick up, helped by a growing population and the sustained influx of tourists, especially those with elevated purchasing power."

Business mood is upbeat

The latest PMI (Purchasing Managers Index) data from S&P Global suggests that the mood among business owners is generally bullish. They are getting in more orders, their input costs have started to come down, and they are able to get fairly sustained demand from their buyers.

That local businesses are starting to feel their input costs drop will be the biggest positive as far as they are concerned. The coming days will provide clarity on what the Dollar Index will react to the Fed pause. The Index - which measures the relative strength of the dollar against major currencies - had been on the rise in recent weeks. (The Dollar Index is currently above 102. Last year, it had gone past 110.)

For the moment, though, UAE businesses and consumers can bask in the knowledge that they will not have to pay extra on any loan they have.