Do not expect interest rates to rise any time soon

A saver with a large pot of cash in a fixed rate account nearing completion asks for a global interest rate outlook.

As a saver, I feel confused. I have a large pot of cash saved up in a fixed rate account that is near the end of its fixed period. I'm wondering whether to take on another fixed deposit tenure or keep it in a variable rate account. Are there any indicators that global interest rates will rise any time soon? MN, Dubai

The expert view:

Siddharth Bhatia, the chief investment officer at Guardian Wealth Management

Timing the exact lift-off is not possible, because the US Fed is dependent on jobs and inflation data. These two economic statistics are driving forces of monetary policy in the US. And right now, inflation rates are very low and do not seem to be going higher any time soon. Recently employment growth – which was the brightest point of the US economic recovery – has begun to slow. This could indicate a cooling economy. If this continues, the US Federal Reserve will have no reason to increase rates next month and maybe not in September either. Having said that, this very well might be a blip in longer-term employment growth. And inflation will surely appear if US employment numbers keep coming in at such a strong rate.

There are two things to consider here before we touch upon timing the interest rate market: the term of the required deposit and currency of the investor. For US dollars, the US central bank will increase rates some time in the next 12 months. And after that, usually within a couple of quarters, the fixed deposit rates go up. So the answer is “yes”, one can consider a variable rate deposit if investing US dollars for the longer term, as rates have nowhere to go but up from here.

The same is true for dirham deposits as the peg to the dollar makes the UAE mirror American monetary policy (otherwise the peg cannot remain). If the US increases rates, local rates will rise too.

Coming back to US deposits, one must note that the transfer mechanism of higher rates moving from the central bank to the fixed deposit rate offered by retail banks, is not instant and certainly not fixed. This means that the banks can take their own sweet time to raise rates they offer on deposits. Thus the term of deposit is so important here, as anything above three years will surely benefit from a variable rate deposit, but less than that is not as certain.

The reader’s view:

Ahmed Rateb, Abu Dhabi

For a couple of years now, markets have been anticipating a rise in interest rates from the US Federal Reserve which has kept rates near zero since 2009. The reason they and other central banks around the world have kept rates low is to discourage people from keeping money in the bank rather than spending it.

There are many signs, however, that the Fed may be close to finally raising rates. Many economists believe this will happen by the end of the year. If it does, it is unlikely the Fed would raise rates sharply, so you would probably not get a significant rate of return on a fixed deposit in dirhams, which are pegged to the dollar. The answer to your question of course depends a lot on the duration of the fixed deposit. Anything longer than a six-month deposit would probably not be prudent.

Why not just consider leaving your money liquid in an ordinary savings account until things become clearer?

The next Money Clinic:

My cousin is an overseas worker in Dubai. He has two loans that have blown up to Dh60,000 and he is not able to pay them back as his company always delivers his salary late. He wants to consolidate the loans to reduce his payments, but wants to know also if he will be able to travel outside the UAE after doing so. He needs to go home this month to attend to a very important matter. That is his main concern: would a bank give him clearance to travel? AC, unknown

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The advice provided in our columns does not constitute legal advice and is provided for information only. Readers are encouraged to seek appropriate independent legal advice.

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