The UAE Central Bank maintained its benchmark borrowing rate as the US Federal Reserve paused its tightening cycle after having increased interest rates to their highest in 16 years to tame inflation and restore price stability.
The Fed, which increased its benchmark rate for the tenth consecutive time last month, maintained it range of 5 per cent to 5.25 per cent.
The Fed has raised rates by combined 500 basis points over the past 15 months, their highest since 2007, shortly before the start of the 2008 global financial crisis. It is pausing now to assess the effects of the tightening cycle on the economy.
The US central bank has raised rates aggressively to bring inflation down to its target range of 2 per cent after prices hit a four-decade high of 9.1 per cent in June of last year.
Data released on Tuesday showed that US inflation had cooled to an annual 4 per cent in May, from 4.9 per cent, the lowest level since March 2021. Meanwhile, core inflation, which excludes food and energy, softened to 5.3 per cent, from 5.5 per cent.
The latest reading from the US on prices "laid the foundation for no action from the Fed today in terms of an interest rate hike" said Naeem Aslam, chief investment officer at Zaye Capital Markets.
"Traders would like to see the Fed take the summer off and sit on the beach. They have been increasing the interest rate very aggressively, and the fruit of their labour is clearly showing in the inflation data.
David Kohl, chief economist at Julius Baer said the Swiss bank expects "further tightening of US credit dynamics in the coming weeks and lower inflation readings in the coming months, which should convince the Fed to refrain from further rate hikes".
Most central banks in the GCC follow the Fed's policy rate moves due to their currencies being pegged to the US dollar, with Kuwait the only exception in the six-member economic bloc as its dinar is linked to a basket of currencies.
The UAE Central Bank kept its benchmark borrowing rate, its base rate for the overnight deposit facility, at 5.15 per cent.
It maintained the rate applicable to borrowing short-term liquidity from the regulator through all standing credit facilities at 50 bps above the base rate.
The base rate, which is anchored to the Fed's interest on reserve balances (IORB), signals the general stance of the Central Bank’s monetary policy and provides an effective interest rate floor for overnight money market rates.
The UAE economy grew by about 7.6 per cent last year, the highest in 11 years, after expanding 3.9 per cent in 2021.
It is projected to grow 3.9 per cent in 2023 and 4.3 per cent in 2024, according to the Central Bank.
Inflation in the Emirates was 4.8 per cent in 2022 and is projected at 3.2 per cent and 2.8 per cent in 2023 and 2024, respectively, according to the Central Bank's Quarterly Economic Review 2022.
That compares with a global inflation rate of 8.7 per cent in 2022. Global inflation will decrease to 7 per cent this year and 4.9 per cent in 2024, according to International Monetary Fund estimates.
In April, the Institute of International Finance projected an even lower UAE inflation rate of 2.4 per cent in 2023, supported by lower global commodity prices and manufacturing unit value.
Despite tighter global financial conditions, the UAE's non-hydrocarbon real growth will remain strong at 4.8 per cent this year, the Washington-based institute said.
That is above the 4.2 per cent estimate of the Central Bank for this year and the 4.6 per cent forecast for 2024.
Annual oil gross domestic product growth has been forecast at 3 per cent and 3.5 per cent in 2023 and 2024, respectively, according to the Central Bank.
“Rising interest rates will have limited impact on economic activity in the UAE,” the IIF said.
UAE banks remain adequately capitalised while the loan-to-deposit ratio edged down to 86 per cent in December 2022, according to the IIF.
Net foreign assets of commercial banks more than doubled to $104 billion at the end of 2022.
The Emirates remains the main regional destination of foreign direct investment inflows, attracting about $22 billion in 2022 or about 4.4 per cent of GDP, one of the highest among emerging economies, according to the IIF.
The Central Bank of Qatar also held its policy rate, with its repo rate maintained at 5.75 per cent, its deposit rate at 5.5 per cent and the lending rate at 6 per cent.
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Key facilities
- Olympic-size swimming pool with a split bulkhead for multi-use configurations, including water polo and 50m/25m training lanes
- Premier League-standard football pitch
- 400m Olympic running track
- NBA-spec basketball court with auditorium
- 600-seat auditorium
- Spaces for historical and cultural exploration
- An elevated football field that doubles as a helipad
- Specialist robotics and science laboratories
- AR and VR-enabled learning centres
- Disruption Lab and Research Centre for developing entrepreneurial skills
More on animal trafficking
Ten tax points to be aware of in 2026
1. Domestic VAT refund amendments: request your refund within five years
If a business does not apply for the refund on time, they lose their credit.
2. E-invoicing in the UAE
Businesses should continue preparing for the implementation of e-invoicing in the UAE, with 2026 a preparation and transition period ahead of phased mandatory adoption.
3. More tax audits
Tax authorities are increasingly using data already available across multiple filings to identify audit risks.
4. More beneficial VAT and excise tax penalty regime
Tax disputes are expected to become more frequent and more structured, with clearer administrative objection and appeal processes. The UAE has adopted a new penalty regime for VAT and excise disputes, which now mirrors the penalty regime for corporate tax.
5. Greater emphasis on statutory audit
There is a greater need for the accuracy of financial statements. The International Financial Reporting Standards standards need to be strictly adhered to and, as a result, the quality of the audits will need to increase.
6. Further transfer pricing enforcement
Transfer pricing enforcement, which refers to the practice of establishing prices for internal transactions between related entities, is expected to broaden in scope. The UAE will shortly open the possibility to negotiate advance pricing agreements, or essentially rulings for transfer pricing purposes.
7. Limited time periods for audits
Recent amendments also introduce a default five-year limitation period for tax audits and assessments, subject to specific statutory exceptions. While the standard audit and assessment period is five years, this may be extended to up to 15 years in cases involving fraud or tax evasion.
8. Pillar 2 implementation
Many multinational groups will begin to feel the practical effect of the Domestic Minimum Top-Up Tax (DMTT), the UAE's implementation of the OECD’s global minimum tax under Pillar 2. While the rules apply for financial years starting on or after January 1, 2025, it is 2026 that marks the transition to an operational phase.
9. Reduced compliance obligations for imported goods and services
Businesses that apply the reverse-charge mechanism for VAT purposes in the UAE may benefit from reduced compliance obligations.
10. Substance and CbC reporting focus
Tax authorities are expected to continue strengthening the enforcement of economic substance and Country-by-Country (CbC) reporting frameworks. In the UAE, these regimes are increasingly being used as risk-assessment tools, providing tax authorities with a comprehensive view of multinational groups’ global footprints and enabling them to assess whether profits are aligned with real economic activity.
Contributed by Thomas Vanhee and Hend Rashwan, Aurifer
On the menu
First course
▶ Emirati sea bass tartare Yuzu and labneh mayo, avocado, green herbs, fermented tomato water
▶ The Tale of the Oyster Oyster tartare, Bahraini gum berry pickle
Second course
▶ Local mackerel Sourdough crouton, baharat oil, red radish, zaatar mayo
▶ One Flew Over the Cuckoo’s Nest Quail, smoked freekeh, cinnamon cocoa
Third course
▶ Bahraini bouillabaisse Venus clams, local prawns, fishfarm seabream, farro
▶ Lamb 2 ways Braised lamb, crispy lamb chop, bulgur, physalis
Dessert
▶ Lumi Black lemon ice cream, pistachio, pomegranate
▶ Black chocolate bar Dark chocolate, dates, caramel, camel milk ice cream
The specs
Engine: 2.0-litre 4-cyl turbo
Power: 201hp at 5,200rpm
Torque: 320Nm at 1,750-4,000rpm
Transmission: 6-speed auto
Fuel consumption: 8.7L/100km
Price: Dh133,900
On sale: now
The specs
Engine: 3.8-litre V6
Power: 295hp at 6,000rpm
Torque: 355Nm at 5,200rpm
Transmission: 8-speed auto
Fuel consumption: 10.7L/100km
Price: Dh179,999-plus
On sale: now
Labour dispute
The insured employee may still file an ILOE claim even if a labour dispute is ongoing post termination, but the insurer may suspend or reject payment, until the courts resolve the dispute, especially if the reason for termination is contested. The outcome of the labour court proceedings can directly affect eligibility.
- Abdullah Ishnaneh, Partner, BSA Law
