A 25 basis point increase in the interest rate of the U.S. Federal Reserve is likely to impact borrowing costs in the United Arab Emirates. Given the dirham's peg to the U.S. dollar, the Central Bank of the UAE may also follow this increase. If this hike occurs, the Central Bank's base rate will rise from 3.65% to 3.90%.
Economic Implications of the Interest Rate Increase
Analysts believe that this decision will not have a significant impact on local markets, as banks and investors have already factored these financial conditions into their pricing. However, the cost of financing for homeowners, businesses, and borrowers with loans linked to the Emirates Interbank Offered Rate (EIBOR) will gradually increase.
Mahdoor Kakar, founder and CEO of Elevate Financial Services, said: "Federal futures indicate a 94% chance of a 25 basis point increase on Wednesday, bringing the U.S. policy rate to 3.75-4.00%." He also added that due to the currency peg, the Central Bank of the UAE is likely to follow this increase.
Impact on Households and the Housing Market
The impact of this interest rate increase will gradually become apparent. Kakar stated: "Depositors are likely to benefit from better returns on deposits and term deposits sooner than borrowers." Meanwhile, households may feel the effects at the reset dates of their EIBOR-linked loans and mortgages.
For homeowners, even small changes in rates can have a significant impact over time. For example, if a 1.5 million dirham mortgage with 25 years remaining increases by 25 basis points, monthly payments will increase by about 210 dirhams, which is approximately 2500 dirhams annually.
Other analysts predict that holders of variable-rate loans and businesses will be more affected. Hamza Dweik, Head of Business (MENA) at Saxo Bank, said: "For the UAE, the impact is more immediate because the dirham is pegged to the U.S. dollar, meaning that any Federal action is usually followed by the Central Bank of the UAE as well."
He noted that a 2 million dirham variable-rate mortgage may incur higher costs for borrowers. Particularly in the real estate, construction, and SME financing sectors, sensitivity to borrowing costs will be greater.
Vijay Walcha, Investment Manager at Century Financial, added that the UAE banking system is likely to be quickly impacted, as local rates closely align with U.S. policies. He stated: "When rates rise, lending rates across the system also increase."
For borrowers, this rate increase will only be felt gradually, with increased loan payments at the next reset dates. While this rate increase may add only a few hundred dirhams a month for some homeowners, policymakers and consumers are closely monitoring signs that indicate rates will remain high for a longer duration.
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