The UAE Central Bank held its benchmark borrowing rate after the US Federal Reserve hit pause for the second time this year as core inflation and the labour market in the US slowed.
The Fed held its policy rate, which is at the highest since 2001, as it aims to bring inflation down to its target range of 2 per cent after prices hit a four-decade high in June 2022.
The US central bank left the federal funds rate between 5.25 per cent and 5.5 per cent at the end of its two-day meeting on Wednesday.
While inflation in the US in August increased 3.7 per cent from 12 months earlier and was slightly up from 3.2 per cent in July, it has decelerated from its four-decade of 9.1 per cent in June 2022.
Wage growth, an important driver of inflation that is a main concern of the Fed has also cooled more than expected last month with unemployment edging up to 3.8 per cent last month, according to data from the Bureau of Labour Statistics.
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 maintained its base rate for the overnight deposit facility at 5.4 per cent, effective from Thursday.
It also 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 regulator said on Wednesday.
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's economy grew by 3.8 per cent on an annual basis in the first quarter of this year, boosted by its strong non-oil sector extending the momentum of its 7.9 per cent expansion in 2022, its biggest in nearly 11 years.
Business activity in the UAE’s non-oil private sector also strengthened last month, with the year-ahead sentiment among those surveyed reaching its highest level since March 2020, as output rose sharply and businesses registered their most rapid reduction in delivery times in more than four years.
The seasonally adjusted S&P Global purchasing managers’ index reading of the Arab world's second-largest economy came in at 55 in August, well above the neutral 50-point mark that separates growth from contraction.
The UAE's economy is forecast to expand by 3.3 per cent this year, reflecting oil production cuts agreed upon by Opec+ members, according to the Central Bank's latest Quarterly Economic Review.
Strong reform efforts under the UAE 2050 strategies and advanced progress in comprehensive economic partnership agreements (Cepa) talks will boost trade and integration in global value chains and further attract foreign direct investment, according to the International Monetary Fund.
Inflation in the Emirates – stoked by increasing energy prices, imported inflation and rising employment – was 4.8 per cent in 2022 and is projected at 3.1 per cent and 2.6 per cent in 2023 and 2024, respectively, reflecting lower energy and food prices, according to the Central Bank. That compares with a global inflation rate of 8.7 per cent in 2022.
Global inflation will fall to 6.8 per cent this year and 5.2 per cent in 2024, according to IMF estimates.
This is still above the preferred 2 per cent target of central banks.
The Institute of International Finance has 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, according to the IIF.
That is above the 4.5 per cent estimate of the Central Bank for this year and 4.6 per cent forecast for 2024.
The Central Bank of Qatar also held its policy rate, with its repo rate maintained at 6 per cent, its deposit rate at 5.75 per cent and the lending rate at 6.25 per cent.
