Consumers in the UAE could soon experience significant financial relief, as experts anticipate a decline in lending rates following the latest decision by the US Federal Reserve.
On Wednesday, the Fed announced that it would maintain its key benchmark rate within the 5.25 percent to 5.50 percent range, a level unchanged since July 2023.
The UAE dirham, pegged to the US dollar, has led the Central Bank of the UAE (CBUAE) to keep the Emirates Interbank Offered Rate (EIBOR) overnight deposit facility steady at 5.40 percent.
Additionally, the CBUAE has opted to maintain the interest rate for short-term liquidity borrowing at 50 basis points above the base rate for all standing credit facilities.
The Base Rate, influenced by the Fed’s interest on reserve balances (IORB), acts as a critical benchmark for UAE overnight money market interest rates.
The Federal Reserve’s decision to hold its rate steady follows a press conference where Fed Chair Jerome Powell indicated that the possibility of interest rate cuts would be discussed in the upcoming Federal Open Market Committee (FOMC) meeting scheduled for September.
For the UAE, the persistence of lending rates above five percent over the past 15 months has been notable. Currently, these rates are nearing the peak levels last seen in 2007.
Should the Fed implement a rate cut in September, experts predict that EIBOR could fall to approximately five percent within the next three months.
Vijay Valecha, Chief Investment Officer at Century Financial, emphasized the potential benefits of such a rate cut. “This would provide significant relief to the consumer sector, as it would prevent further increases in lending rates for auto loans, credit cards, and personal loans.
Lower rates would also enable local state-owned enterprises and infrastructure projects to access credit at reduced costs, facilitating refinancing and broader credit utilization,” Valecha said.
The UAE’s construction sector, with a pipeline of nearly $500 billion worth of projects over the next five years, stands to gain substantially from reduced borrowing costs.
This pipeline includes key infrastructure, housing, road building, and non-oil economy diversification projects like hospitality and tourism. “A decrease in debt costs will boost credit uptake and spending, benefiting these critical sectors,” Valecha added.
Market analysts anticipate a 25-basis point rate cut by the US Fed in their September meeting. Mohamed Hashad, Chief Market Strategist at Noor Capital, noted that the Fed’s current stance reflects a commitment to market expectations.
“Chairman Jerome Powell’s approach aims to instill confidence in global financial markets, demonstrating a readiness to align policy with evolving economic conditions,” Hashad explained.
In summary, UAE consumers and businesses are poised for potential financial relief if the Federal Reserve lowers its interest rates in September. This change could lead to reduced borrowing costs, benefiting various sectors and stimulating economic activity in the UAE.