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Cheaper loans for UAE consumers likely soon

With the US Federal signalling a lowering of rates, UAE consumers can access cheaper credit

Consumers in the UAE can look forward to significant relief as lending rates are likely to fall soon, experts said.

The scenario emerged as the US Federal Reserve held its key benchmark rate on Wednesday. The Fed’s benchmark rate remains in the 5.25 per cent to 5.50 per cent range, a level maintained since July 2023 when it was last raised.

With the UAE dirham pegged to the US dollar, the UAE central bank kept their Emirates Interbank offered rates EIBOR overnight deposit facility unchanged at 5.40 per cent. 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.

The Base Rate, which is anchored to the US Federal Reserve’s interest on reserve balances (IORB), signals the general stance of monetary policy and provides an effective floor for overnight money market interest rates in the UAE, experts said. Major GCC central banks follow the Fed’s policy rate to balance and maintain their currency peg with the US dollar, with the exception of Kuwait, which links its rate against basket of currencies.

During the press conference following the interest rate announcement, Fed Chair Jerome Powell emphasiaed that the possibility of interest rate cuts would be discussed at the next Federal Open Market Committee (FOMC) meeting in September.

In case of UAE markets, the central bank lending rate has remained above five per cent since last 15-month period. The current interest rates are near the peak of the last 2007 highs.

Should the Fed cut its interest rate in the September meet, the EIBOR rate is expected to touch near five per cent over the next three-month period. “This should provide a huge relief to the overall consumer sector as other sector lending rates including auto loans, credit card interest and personal loans will not increase further. The rate cuts should also allow the local state owned enterprises and other infrastructure players to utilise their credit limits more as they look to use debt at a lower cost and even refinance at lower debt in few cases,” Vijay Valecha, chief investment officer, Century Financial, said.

The UAE currently has an estimated construction project pipeline of nearly $500 billion over the next five years. These includes projects in the core infra as well as housing, road building and other critical projects in the non oil economy diversification sector like hospitality and tourism. “Lowering of debt costs will be a huge boon for further credit uptick and spending purposes,” Valecha added.

This forward-looking approach acknowledges the need for flexibility in monetary policy. If inflation continues to decline as expected, the Fed may consider lowering interest rates to stimulate economic growth.

Markets are now expecting a 25-basis points rate cut by the US Fed in their September meeting. “The Federal Reserve, under the leadership of Chairman Jerome Powell, has demonstrated unwavering commitment to aligning and determination to adjust its actions with market expectations. Their recent decision to maintain interest rates without deviation from prevailing trends reflects this resolve. By doing so, Powell aims to instill confidence in investors across global financial markets,” said -Mohamed Hashad, chief market strategist, Noor Capital.