UAE Central Bank lowers interest rates following US Federal Reserve move

Regulator cuts base rate for overnight deposit facility by 25 basis points

The UAE Central Bank typically aligns its interest rate decisions with those of the Fed due to the dirham's peg to the US dollar. Ryan Carter / The National

The UAE Central Bank reduced its benchmark interest rate by 25 basis points, after the US Federal Reserve’s move on Wednesday to cut rates to stimulate economic activity as inflationary pressures subside.

The banking regulator reduced its base rate for the overnight deposit facility to 4.40 per cent, effective from Thursday. It maintained the interest rate applicable to borrowing short-term liquidity from the regulator at 50 basis points above the base rate for all standing credit facilities, the regulator said on Wednesday.

This move aligns with the Fed’s decision on Wednesday to lower the interest rate on reserve balances by 25 basis points.

The UAE Central Bank base rate, which is anchored to the Fed's interest on reserve balances, signals the general stance of the Central Bank's monetary policy and provides an effective interest rate floor for overnight money market rates in the UAE.

The UAE Central Bank typically aligns its interest rate decisions with those of the Fed because of the dirham's peg to the US dollar.

The Fed began its easing cycle with a 50 basis points cut in September on slowing inflation after keeping rates at a 22-year high for more than a year. Last month, it lowered the interest rate on reserve balances by 25 basis points.

The US entered a monetary easing cycle as the Fed aimed to prevent a recession and guide the world’s largest economy to a soft landing.

This decision reflects the Fed's confidence that "elevated levels of inflation are not overly concerning", Srijan Katyal, global head of strategy and client services at Abu Dhabi-based international securities brokerage ADSS.

“The Fed appears to have dispatched of inflationary worries surrounding Trump’s election win, which fueled higher US yields, a stronger dollar and surging stocks."

Rate cut will likely further boost risk assets helping stocks build on year-to-date rallies with potential for small cap stocks to continue to make up ground on tech heavy names, as Trump policies would support local businesses through tax cuts and protectionist policy, Mr Katyal added.

US Federal Reserve chairman Jerome Powell. The UAE Central Bank's move aligns with the Fed’s decision on Wednesday to lower the interest rate on reserve balances by 25 basis points. AP

Economic impact

The UAE continues to prioritise diversifying its economy away from oil, with growth in the non-oil sector accelerating in recent quarters.

The country’s economy is now projected to expand by 4 per cent this year, a slight upward revision from the 3.9 per cent forecast in June, according to the latest report by the UAE Central Bank.

The regulator also lowered its inflation forecast for 2024 to 2.2 per cent, down from an earlier estimate of 2.3 per cent. The Central Bank, in September, noted that inflation forecasts could be revised downward if disinflationary trends in food, beverages, and key non-tradable components persist.

The UAE's economy grew by 3.4 per cent in the first quarter, with real GDP reaching Dh430 billion ($117.08 billion), according to preliminary estimates from the Federal Competitiveness and Statistics Centre, cited by the Ministry of Economy in September. The non-oil sector recorded a 4 per cent year-on-year expansion during the period, reflecting continued momentum in the country’s diversification efforts.

Gulf economies follow Fed rates

Most Gulf central banks align their policy rate changes with the Fed, as their currencies are pegged to the US dollar. Kuwait is the exception among the six-member economic GCC bloc, as its dinar is linked to a basket of currencies.

Despite experiencing much lower inflation than other regions, these oil-rich economies kept pace with the Fed’s aggressive rate increase cycle.

The Saudi Central Bank, better known as Sama, on Wednesday matched the Fed rate cut, reducing its repurchase agreement (repo) rate by 25 basis points to 5 per cent and its reverse repo rate by the same basis points to 4.5 per cent.

The Qatar Central Bank reduced the repo rate by 30 basis points to 4.85 per cent. It also reduced its deposit rate to 4.60 per cent, and the lending rate to 5.10 per cent.

The Central Bank of Bahrain cut its key rate on overnight deposits by 25 basis points to 5 per cent, effective Thursday. The CBB said that the move is part of its measures to maintain monetary and financial stability in light of global financial market developments.

The Central Bank of Kuwait said it adopted a “gradual and balanced approach in adjusting the discount rate, ensuring alignment with the local economic conditions, maintaining macroeconomic stability, and enhancing sustainable growth”. It reduced its discount rate by 25 basis points to 4 per cent as of Thursday.

In the Gulf region, home to one third of the world’s proven oil reserves, government spending is primarily driven by oil prices rather than monetary policy.

Economies such as Saudi Arabia, the world’s largest oil exporter, and the UAE, the Arab world’s second-largest economy, are investing tens of billions of dollars in projects aimed at economic diversification. These initiatives are often funded through a mix of government equity, commercial loans and project bonds.