UAE Central Bank cuts interest rates after US Fed move

Attention now turns to 2026 as markets speculate on Fed's potential moves

The UAE Central Bank moves with the US Federal Reserve because the dirham is pegged to the dollar. Antonie Robertson / The National

The UAE Central Bank on Wednesday lowered its benchmark interest rate for the third consecutive time, keeping in step with a divided US Federal Reserve.

The apex regulator said it would cut the base rate applied to its overnight deposit facility by 25 basis points to 3.65 per cent, from 3.90 per cent, effective on Thursday.

That followed the Fed's decision to lower its benchmark rate by 25 basis points on Wednesday after slashing interest rates in September and October.

The 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.

Most central banks in the Gulf 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 its dinar is tied to a basket of international currencies of the country's major trade and financial partners.

The US central bank had pause changes for several quarters, and the rate cuts come amid mounting pressure from the White House, with and President Donald Trump resorting to hostile criticism of Fed chairman Jerome Powell.

Analysts had expected a third rate cut in the second administration of Mr Trump, who has continuously argued that lowering interest rates will help boost the world's largest economy.

The Fed has held firm despite Mr Trump's pressure, with Mr Powell repeatedly saying they will act on merit based on economic factors.

The Fed has a dual mandate, which makes the US central bank distinct among its peers. For months, the Federal Open Market Committee has been considering which side of this mandate to prioritise: tackling inflation or shoring up employment.

While Wednesday's rate cut was expected, there is uncertainty about what Fed members are planning for in 2026. Given the economic situation, it is difficult to predict how many cuts are coming and how markets will react, said Ipek Ozkardeskaya, a senior analyst at Swissquote Bank.

“For the doves, the case for rate cuts is clear: the US labour market has softened, partly due to a combination of aggressive anti-immigration policies, tariff uncertainty and fears around AI-related job displacement,” she said.

“For the most extreme doves, the Fed has 'plenty of room' to cut.”