The UAE Central Bank on Wednesday kept its benchmark interest rate unchanged following the US Federal Reserve’s decision to leave rates on hold, maintaining the country’s monetary policy alignment with the dollar-pegged dirham.
The Central Bank’s benchmark, the Base Rate applicable to the Overnight Deposit Facility (ODF), remains at 3.90 per cent.
The move was widely expected, as the UAE typically mirrors Federal Reserve policy changes to preserve currency stability. The Base Rate, which is anchored to the Fed’s Interest Rate on Reserve Balances (IORB), serves as the key signal of monetary policy and acts as a floor for overnight money-market rates in the UAE.
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The decision means borrowing costs for businesses and consumers are unlikely to change immediately, while banks’ lending and deposit rates are expected to remain broadly stable in the near term.
Analysts say that the consensus view is for a 25 bps hike in December to 4.00-4.25%. “Data since the September hike makes a case for both sides. September CPI came in hot: core rose 0.3% MoM for a second straight month, and shelter inflation accelerated. Also, the headline CPI jumped 0.6% monthly on the back of higher energy costs. On the other side, payrolls slowed sharply to just 29,000, and revisions removed 60,000 jobs from prior months. Wage growth remains contained at 3.0% YoY. The economy continues to expand, but signs of cooling in the labour market support a cautious, wait-and-see approach,” said Vijay Valecha, Chief Investment Officer, Century Financial.
Hamza Dweik, Head of Trading (MENA), Saxo Bank, stressed that the key point for the UAE is the dirham’s peg to the US dollar. “This creates a strong link between US monetary policy and domestic interest-rate conditions, meaning changes in the Fed’s policy stance can feed through to financing conditions for UAE households and businesses. That makes the Fed’s guidance particularly important for mortgages, corporate borrowing, SME financing, and rate-sensitive areas of the economy,” he said.
The UAE is nevertheless relatively well placed to absorb restrictive financial conditions. “Higher rates can temper credit demand and make leveraged investments more expensive, but they can also provide attractive returns for savers and investors holding cash and short-duration fixed-income instruments. For UAE markets, therefore, the bigger issue is likely to be the eventual path of US rates rather than a single meeting,” Dweik added.
Source: Khaleej Times
