UAE consumers to face higher rates for longer

With the UAE following the US Federal Reserve’s decision to hold key rates, consumers in the country are unlikely to get any relief soon with rates continuing to stay high, analysts said on Thursday.

On Wednesday, the US Federal Reserve left interest rates unchanged after its June meeting, keeping them between 5.25 per cent and 5.5 per cent. This marks the eighth time in nine meetings they’ve held rates steady, despite raising them eleven times in recent years to combat inflation. Inflation in the US has cooled slightly, reaching 3.3 per cent YoY in May compared to its peak of over 9 per cent in mid-2022.

The core CPI YOY also cooled to 3.4 per cent. The last rate hike occurred in July 2023. “While inflation remains above the Fed’s target of 2 per cent, the economy appears strong, allowing the Fed to pause rate increases and consider just one cut in 2024,” Vijay Valecha, CIO, Century Financial, said,

The Central Bank of the UAE (CBUAE) mirrored the cautious stance of the US Federal Reserve by keeping its Base Rate at 5.40 per cent. With rates staying at high levels, UAE mortgage rates and corporate loan borrowers are unlikely to see any relief soon. “However, the strong UAE economy means banks will likely to see strong loan growth. High interest rates are unlikely to hamper UAE’s growth due to strong performance of its non-oil economy. Additionally, from the UAE’s perspective, the US dollar is likely to stay strong and this should keep the imports cheap since the dirham is pegged to the greenback,” Valecha said.

Even with higher rates expected to last longer, the stock market rallied. This might be due to strong corporate earnings, ongoing advancements in AI, and investor pricing the future rate cuts.

Interest rates on 10-year Treasury notes have climbed significantly this year, reaching 4.26 per cent. While that’s lower than the peak of 4.99 per cent set in October 2023, it’s still a notable increase. This rise happened even though Federal Reserve officials and market expectations for rate cuts have shifted to later in 2024. The yield had actually dropped at the end of 2023 in anticipation of those earlier cuts.

This rise in yields has implications for the bond market. Prices typically fall with rising rates. However, the recent pause in rate hikes and prior increases make bonds more attractive for new investments. If rates do eventually fall, bond prices will climb, benefiting investors.

“While challenges exist, the Gulf’s economic diversification efforts and strong fundamentals offer opportunities for growth and resilience. By staying informed about global economic developments and understanding their potential impacts, investors can navigate the Gulf’s dynamic financial landscape with confidence,” Hashad said.