UAE Central Bank maintains base rate at 15 basis points after Fed holds rates steady

The rate signals the general stance of the CBUAE’s monetary policy, the regulator says

The UAE's central bank maintained its base rate at 15 basis points following the Fed decision. Sammy Dallal / The National

The Central Bank of the UAE (CBUAE) will maintain the base rate applicable to the Overnight Deposit Facility (ODF) at 15 basis points effective Thursday after the US Federal Reserve Bank decided not to raise interest rates from near zero.

The UAE central bank’s decision is in line with the US central bank's decision on Wednesday to set the Interest on Reserve Balances (IORB) at 15 basis points, the regulator said in a statement on Thursday.

The CBUAE also “decided to maintain the rate applicable to borrowing short-term liquidity from the CBUAE through all standing credit facilities at 50 basis points above the base rate”.

The base rate is the interest rate a central bank charges its domestic commercial lenders to borrow money.

“The base rate, which signals the general stance of the CBUAE’s monetary policy, shall be anchored to the US Federal Reserve Board’s IORB rate,” the central bank said in its statement. “This follows the Federal Reserve’s announcement that, as of July 29, 2021, rates applicable on Interest on Excess Reserves (IOER) and Interest of Requited Reserves (IORR) will be replaced by the single IORB rate.”

Most GCC central banks follow the Fed moves on key interest rates due to the peg of their currencies to the US dollar, with the exception of Kuwait, whose dinar is linked to a basket of currencies. The region’s central banks last reduced rates in March 2020 following the biggest rate cut by the Fed since the 2008 global financial crisis.

US equities rose and Treasury yields fell following the Fed's decision. Fed chairman Jerome Powell said that despite the economy’s progress he was still “a ways away” from raising them.

In a statement, the US central bank's Federal Open Market Committee said: "The path of the economy continues to depend on the course of the virus. Progress on vaccinations will likely continue to reduce the effects of the public health crisis on the economy, but risks to the economic outlook remain."

The Nasdaq 100 extended its advance and the S&P 500 reversed a decline to end the session little changed following the announcement. Alphabet, Google’s parent company, gave the biggest boost to both indexes after it reported sales that beat estimates.

“While the economy appears to be inching closer, the Fed has not yet seen sufficiently outsized data to warrant a meaningful policy change,” Greg Bassuk, chief executive at AXS Investments, was quoted as saying this by Bloomberg.

“As a result, we expect the markets to remain volatile in the near-term, driven largely by this season’s remaining corporate earnings announcements, key upcoming economic data reports and the pace of progress in curtailing the global pandemic.”

Earlier this week, the International Monetary Fund maintained its global economic forecast at 6 per cent but downgraded its growth outlook for emerging markets and developing economies due to the uneven access to vaccines and the emergence of Covid-19 variants that are hindering the shape of the recovery.