No respite for UAE borrowers as interest rates remain high

Borrowing costs to remain unchanged as Fed holds rates at 23-year high

Vijay Valecha, Khaleej Times, May 2, 2024

The US Federal Reserve’s decision to maintain its key monetary policy rate is bad news for borrowers in the UAE who have been waiting for months to see a drop in the current high interest rates on loans and mortgages.

Since the UAE currency is pegged to the dollar, borrowers in the Emirates are not likely to get any respite from the high loan rates in the foreseeable future.

The Central Bank of the UAE (CBUAE) has decided to maintain the base rate applicable to the Overnight Deposit Facility (ODF) at 5.40 per cent following the Fed move to keep it steady at a 23-year high.. The CBUAE has also decided to maintain the interest rate applicable to borrowing short-term liquidity from the CBUAE at 50 basis points above the base rate for all standing credit facilities.

As a result, borrowing costs for a range of personal finance products — from loans to credit cards, mortgages, savings and remittances — will remain at the current high rate.

Vijay Valecha, CIO, Century Financial, said the US Federal Reserve opted to maintain its key monetary policy rate, marking the sixth consecutive time it has chosen not to make any changes, while still anticipating at least one rate cut by the end of the year.

“The Federal Open Market Committee (FOMC) had previously indicated that rates would remain unchanged within a range of 5.25 per cent to 5.5 per cent during its two-day policy meeting. This decision has significant implications for the UAE economy, as the UAE dirham is pegged to the dollar. Therefore, it is expected that interest rates in the UAE will also remain steady in the near future,” said Valecha.

“This is particularly positive news for consumers and businesses in the UAE who have loans or mortgages tied to variable interest rates, as they can now anticipate stability in their monthly payments. The Central Bank of the UAE is likely to release a formal statement in the coming days, confirming its alignment with the Fed’s policy,” said Valecha.

Analysts explained that due to the currency peg between the dollar and dirham, the UAE effectively imports the monetary policy set by the Fed. A major repercussion of the peg is that the CBUAE cannot maintain independent monetary policy.

The currency peg forces local interest rates to follow those in the US, even when the economic outlooks of the two countries diverge, analysts say. The optimal monetary policy of the United States is not necessarily that of the UAE as the GDP growth in the UAE has outstripped GDP growth in the US by a large margin and is expected to continue to do so for the foreseeable future, they said.

Source

Khaleej Times