The UAE Central Bank on Wednesday lowered its benchmark interest rate after the US Federal Reserve’s move to cut its policy rate for the second time since US President Donald Trump resumed office in January.
The Fed lowered its benchmark rate by 25 basis points on Wednesday after lowering interest rates by similar levels in September.
The UAE Central Bank said it would cut the base rate applied to its overnight deposit facility by 25 basis points to 3.90 per cent, from 4.15 per cent, effective from Thursday.
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.
Most central banks in the six-member Gulf region move in unison with the Fed's policy rate moves because their currencies are pegged to the dollar. Kuwait is the only exception in the Gulf region as the dinar is tied to a basket of international currencies of the country's major trade and financial partners.
The rate cut comes amid mounting pressure from the White House to lower rates and open criticism by Mr Trump of Fed chairman Jerome Powell. The White House is currently trying to overhaul the Fed's board of governors who are responsible for setting the rates.
The Fed has a dual mandate to keep both inflation and unemployment low. When inflation soars, it raises interest rates to make borrowing more expensive, which in turn discourages consumers and businesses from spending, cooling inflation.
When inflation cools, it lowers interest rates that also helps to bolster the labour market, because it's easier for businesses to expand and hire more workers if it's less expensive to borrow money.
The US reported lower than anticipated inflation data for the month of September, with the Consumer Price Index increasing by 0.3 per cent for the month, down from 0.4 per cent in August, according to the latest data from the Bureau of Labour Statistics.
On an annual basis, the index rose 3 per cent, up from 2.9 per cent in August but below the expectations of 3.1 per cent among economists polled by Bloomberg.
However, with the US government shutdown preventing the Labour Department releasing its monthly jobs report, greater attention was fixed on data from the private sector. The data, released by payrolls processing firm ADP, showed employers shed a seasonally adjusted 32,000 jobs last month, further cementing fears of a slowing labour market that first emerged over the summer.
Strong UAE economic growth
The UAE economy continues to grow as it expands its non-oil sector and forges new trade partnerships with different countries across the globe.
The UAE economy is projected to outperform the global average this year as it is expected to remain resilient to uncertainty in the global economy, the International Monetary Fund said this month.
The IMF projects the UAE's gross domestic product to expand 4.8 per cent this year, driven by strong non-oil growth and Opec+ production increases, before expanding by a further 5 per cent in 2026.
The fund's growth projection is slightly below the UAE Central Bank's forecast for this year of 4.9 per cent.
