The Central Bank of the United Arab Emirates on Wednesday raised the overnight deposit facility rate by 25 basis points to 3.9% from 3.65%. This decision was made after the Federal Reserve of the United States increased interest rates by 25 basis points from 3.75% to 4%.
Impact on Borrowing Costs
As the UAE dirham is pegged to the US dollar, the UAE typically adjusts interest rates in tandem with the United States. In the previous Federal Reserve meeting in July, rates remained steady at 3.50% to 3.75%, and the Central Bank of the UAE also kept its base rate at 3.65%. Changes in the UAE's base rate affect borrowing costs and can impact the Emirates Interbank Offered Rate (Eibor), which is used as a benchmark for mortgages and other loans.
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Pressure on Household Costs
Homeowners with variable-rate loans are among those who will bear the brunt of the interest rate hike. Higher rates can lead to increased monthly payments, and those with fixed-rate loans may also face higher costs when their rates are renewed. New buyers may find more expensive mortgage loans, which could reduce their borrowing capacity.
Personal loans, auto financing, and credit card costs may also become more expensive with rising rates, putting additional pressure on household budgets. However, savers may benefit from higher rates. Higher rates can lead to better returns on fixed deposits and savings products offered by banks.
Higher interest rates are designed to control inflation, but this increase does not directly reduce everyday costs such as food prices and rents. For consumers in the UAE, this situation creates conflicting pressures. On one hand, high borrowing costs can strain household expenses, while on the other hand, high oil prices and other input costs can affect the prices of goods and services.
Attention will now turn to the next Federal Reserve meeting in late October. Policymakers will be looking for signs of inflation, employment, and energy prices to determine whether there is a need for further rate increases. For UAE households, the immediate focus is on how the rate increases will affect Eibor and the rates that banks charge for mortgages and other loans.
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