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UAE: Loans to get cheaper as rate cuts loom

UAE Central Bank expected to lower rates in line with US Federal Reserve move

Published: Tue 17 Dec 2024, 8:00 AM

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UAE consumers are expected to gain from cheaper loans as the US Federal Reserve is expected to lower its benchmark rates on Wednesday.

The UAE follows US monetary policy as the UAE dirham is pegged to the US dollar.

Last month, the UAE Central Bank lowered its overnight deposit facility rate from 4.9 per cent to 4.65 per cent last month, following the Fed’s decision to lower its rates to 4.5-4.75 per cent. This time, the US central bank is expected to cut rates to 4.25-4.50 per cent, which means that the UAE Central Bank is likely to lower its rates to 4.4 per cent.

This would mean lower interest rates on cars, homes and personal loans. Overall this is expected to ease inflation in the country, experts say.

“With the Fed’s moves becoming more data-driven, investors will pay close attention to the tone of Chair Powell’s post-meeting remarks and the updated Summary of Economic Projections (SEP), especially the dot plot, which provides insights into the rate path for 2025 and beyond,” said Charu Chanana, Chief Investment Strategist, Saxo Bank.

The Fed Funds futures show a 95 per cent probability of a 25bps rate cut at the December meeting, following a similar move in November. While the rate cut is almost entirely priced in, the market will be watching for any signals of a “hawkish cut”. “This means that while the Fed is easing policy, it could signal caution about the pace of future cuts, either through the committee’s updated dot plot or via Chair Powell’s press conference,” Chanana said.

There’s growing chatter about the Fed possibly skipping a rate cut in January 2025, signalling a potential pause in the easing cycle. This might happen due to a variety of reasons, experts say.

●Sticky Inflation: While shelter inflation is easing, other components of inflation remain persistent, complicating the Fed’s ability to justify an aggressive pace of cuts.

●Resilient Economy: Recent economic data has shown surprising resilience, which may prompt the Fed to take a more measured approach to cutting rates further.

●Trump-flation Risks: With the new Trump administration likely to focus on trade tariffs early on after taking office on January 20, there is a risk that it could create upside risks to inflation, which could make the Fed more cautious about future cuts.

The dot plot, which reflects each FOMC member’s rate expectations, will be critical for market sentiment as it gives insights into the Fed members’ thinking. The dots for 2025, 2026, and 2027 will explain how aggressively the Fed sees rates coming down.

●2025 Outlook: The previous dot plot indicated four rate cuts (100bps) for 2025, but this could be revised to just three or even two cuts as inflation risks remain elevated. “Consensus expects 2025 dot to move to 3.625 per cent from 3.375 per cent, signalling a baseline view of three rate cuts next year. If the 2025 dot moves to 3.875 per cent, signalling just two rate cuts next year, that will be a considerable hawkish surprise for the market,” Chanana said.

●Longer-Term Rates: Projections for 2026 could also shift to two cuts, reflecting a slower normalisation path. Consensus expects the end-2026 rate to be at 3.125 per cent from 2.875 per cent projected by the dot plot in September.

●Terminal Rate: The “long-run” neutral rate could also tick higher to 3 per cent from 2.875 per cent in September, reflecting a structurally higher interest rate environment.

●Updated Economic Forecasts: The SEP will likely be revised to show higher 2024 core PCE inflation from 2.6 per cent in September, lower unemployment from 4.4 per cent, and stronger GDP growth projections for 2024.

Charu Chanana - Chief Investment Strategist- Saxo Bank

Charu Chanana - Chief Investment Strategist- Saxo Bank

Markets have priced in the 25bps cut, but if the Fed signals fewer cuts in 2025, risk assets like equities may see renewed volatility. “A hawkish tone could put downward pressure on equity valuations, especially growth stocks more sensitive to higher rates. Other interest rate-sensitive sectors, such as homebuilders and small-caps, could also face headwinds. Investors may consider rotating into defensive sectors like utilities and consumer staples if the Fed signals a slower pace of cuts,” Chanana said.

●Fixed Income Positioning: If the dot plot hints at a higher terminal rate or fewer cuts in 2025, the yield curve could flatten, with short-term yields rising relative to longer-term yields. This could expose short-duration bonds to downside risk as yields rise.

●FX Strategy: A hawkish rate cut could be supportive for the US dollar, driving demand for the greenback. While there’s potential for a short-term pullback in the dollar due to year-end seasonality and stretched positioning, any dips may be seen as a buying opportunity. “The Trump administration’s potential pro-dollar policies, such as heightened tariff talks, could support the USD in 2025. Meanwhile, the Japanese yen faces downside risks if US 10-year yields jump higher, and tariff threats could weigh on the Chinese yuan, euro, and Australian dollar heading into 2025,” Chanana said.



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