US rate hikes: How is the UAE affected?

How are the Gulf countries, especially the UAE, affected as the US Federal Reserve on Wednesday paused its rate hike cycle?

The Fed paused its rate hike as inflation in the world’s largest economy continues to cool. However, the US central bank believes that the fight against inflation has a ‘long way to go’, and kept doors open for another two possible rate hikes later this year.

In Europe, the European Central Bank raised rates on Thursday, as inflation, while falling, still remains stubbornly high. However, as the economy in the common currency bloc remains in the doldrums, the central bank has a fine balancing act to play in avoiding a recession while trying to tame prices.

In line with the Fed’s decision, the UAE Central Bank, as well as other central banks in the GCC whose currencies are pegged to the US dollar, have also left their rates unchanged. However, as is the norm, they will follow the US central bank’s rate hikes should the Fed increase its rates later this year.

Decisions made by the Federal Reserve regarding interest rates have far-reaching effects on both the domestic and global economy, including in the Gulf region. In light of ongoing speculations about the stability of GCC economies following any upcoming interest rate changes, Forex.com’s analysts shed light on how such changes could potentially impact regional markets, including the UAE.

Before delving into possible effects, a brief explanation of interest rate dynamics would help better understand market movements and trends.

When the Federal Reserve lowers interest rates, it stimulates economic activity by encouraging borrowing and spending, potentially leading to job creation. When interest rates are raised, the Federal Reserve aims to control inflationary pressures and prevent overheating in the economy. Such changes have a direct impact on the US dollar: as interest rates rise, foreign investors find it more appealing to hold US dollar-denominated assets, which leads to an increased demand for the green currency and strengthens its value.

GCC countries, such as the UAE and Saudi Arabia, have their currencies pegged to the US dollar to ensure stability and facilitate international trade and investment.

• Business