The Central Bank of the UAE on Wednesday raised the applicable base rate for overnight deposit facilities by 25 basis points to 3.90%. This action was taken following a 0.25% increase in the interest rate by the Federal Reserve of the United States and reflects the continued alignment of the country's policies with the United States due to the dirham's peg to the dollar.
Impact of Interest Rate Changes on the Financial System
This change in the interest rate is aimed at maintaining monetary stability and the competitiveness of the currency. According to Vijay Valcha, investment manager at Century Financial, this action was largely anticipated, and the Central Bank of the UAE typically aligns its base rate with the Federal Reserve. The base rate was previously 3.65% and has now increased to 3.90%, which helps stabilize overnight money market rates and EIBOR, the interbank index for most local loans.
Consequences of Interest Rate Increase for Borrowers and Depositors
Valcha noted that this increase may lead to higher costs for variable-rate loans as well as borrowing costs for companies. He added that with rising rates, borrowing costs across the system will also increase, and companies currently facing higher energy and transportation costs may encounter more challenges.
Mador Kakar, founder and CEO of Elevate Financial Services, had predicted this change before the Federal Reserve's decision and stated that the 25 basis point increase would raise the UAE's base rate from 3.65% to 3.90%. He also emphasized that the impact of this change on consumers will occur gradually, and depositors may see improvements in deposit yields sooner than borrowers.
Kakar estimates that a full 25 basis point increase on a 1.5 million dirham mortgage with 25 years remaining will add approximately 210 dirhams to monthly installments, equivalent to about 2500 dirhams per year.
Analysts are now focused on the future of Federal Reserve policies and whether decision-makers will continue to maintain higher interest rates until 2027. This rate increase is seen as a key factor in determining economic and business trends in the UAE and other dollar-linked countries.
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