What does the US Federal Reserve's interest rate increase mean for people in the UAE?

The move will affect loans, credit cards, mortgages, car financing and savings accounts

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Consumers will pay more to borrow money after the US Federal Reserve’s decision on Wednesday to raise interest rates by another three quarters of a percentage point to stem the disruptive surge in inflation, financial experts say.

The 75 basis point increase brings the Federal Open Market Committee's short-term rate between 3.75 per cent and 4 per cent, the highest level in 14 years.

This is the Fed's sixth interest rate increase in a row this year to combat inflation, which is at historic levels, and restore price stability.

Fed officials have stressed that they need to act aggressively to tamp down inflation, which currently stands at 8.2 per cent.

The headline Consumer Price Index (CPI) in the US increased by 0.4 per cent in September, up 8.2 per cent from a year earlier.

The core CPI, which excludes food and energy, increased by 6.6 per cent from a year ago, the highest level since 1982, according to Labour Department data.

Central banks are no longer seeking to ensure “cheap money” is available for households, companies and governments to borrow at “exceptionally favourable rates” as they did during the Covid-19 pandemic, said Vijay Valecha, chief investment officer at Century Financial.

“During the pandemic, cheap money was provided to help the economy sustain itself. However, as economies are recovering gradually, the availability of quick money would reduce consumer spending as the cost of borrowing has increased,” he said.

Most central banks in the GCC follow the Fed's policy rate moves due to their currencies being pegged to the US dollar.

The UAE Central Bank also increased its base rate for the overnight deposit facility (ODF) by three quarters of a percentage point.

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 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 UAE Central Bank's monetary policy and provides an effective interest rate floor for overnight money market rates.

Inflation in the UAE is relatively low, compared with other parts of the world. The CPI reading increased by 3.4 per cent during the first quarter of 2022, compared with 0.6 per cent and 2.3 per cent in the third and fourth quarters of 2021, respectively.

Inflation in the Emirates is projected to reach 5.6 per cent in 2022, according to the UAE Central Bank.

The Fed's rate increase comes amid an uncertain global economic outlook fuelled by record-high inflation and Russia’s worsening military assault on Ukraine that has affected commodities markets.

However, the strength of the UAE’s recovery from the pandemic means its economy is well placed to deal with higher rates, said Monica Malik, chief economist at Abu Dhabi Commercial Bank.

“Borrowing costs will rise further, with the Fed firmly focusing on inflation,” Ms Malik said.

Higher rates mean a range of personal finance products — from loans to credit cards, mortgages, savings and remittances — will be affected. Here is a look at some of the effects:

Homebuyers face an increase in mortgage payments after the UAE Central Bank raised its benchmark interest rate on Wednesday. Photo: Luxhabitat Sotheby's International Realty


For mortgage borrowers who have yet to secure a fixed rate, the news might be a concern, said Mohamad Kaswani, managing director at Mortgage Finder.

“However, this has been on the cards for a while, so it shouldn’t come as a real shock. The good news is that even with this recent increase, rates are still at historic lows and there is time to secure a fixed rate before any further hikes.”

For borrowers on fixed-rate home loans, there should be no changes to their mortgage payments until they come to the end of their fixed rate period.
Mohamad Kaswani, managing director at Mortgage Finder

For borrowers on fixed-rate home loans, there should be no changes to their mortgage payments until they come to the end of their fixed-rate period, Mr Kaswani said.

However, borrowers on variable rate mortgages will feel the change as soon as their next monthly payment is due, he said.

“Most banks use [the] three-month Emirates Interbank Offered Rate [Eibor], so borrowers will see the change at the end of this month. For those who would prefer more stability moving forward, they can investigate moving on to a fixed-rate mortgage.”

The best three-year and five-year fixed rates are currently at 4.49 per cent and 4.99 per cent respectively, while variable rates start at 4.71 per cent, according to Mortgage Finder.

Smiling man at coffee break paying with credit card

Credit cards

Interest rates on credit cards in the UAE are already high, at more than 30 per cent a year, and this type of debt is particularly susceptible to rising rates, according to Century Financial's Mr Valecha.

“Credit card debt already has its own high interest rate, so rate hikes from the central banks will result in consumers eventually paying more on any revolving debt,” he said.

“Now that the Central Bank of the UAE has hiked the interest rates, changes to credit card interest rates typically follow, usually within a billing cycle or two.”

Most credit cards have a variable interest rate, which means there is a direct connection to the Fed's benchmark rate, said Mohammed Shaheen, chief executive of broker Seven Capitals.

Borrowers with revolving debt should find a zero-interest balance transfer credit card while they can and start to pay down the balance, Mr Shaheen said.

“In other words, people can look to use this opportunity to get themselves out of a debt,” he said.

Dubai, United Arab Emirates - January 10 2012 - Rolls Royces, Bentleys, Maseratis, Ferraris and other high end cars sit at the Exotic Cars Showroom off Sheikh Zayed Road. The company was recently featured on Channel 4's "Billionaire Boy Racers" . (Razan Alzayani / The National)


Monthly instalments on personal loans and car financing will also rise.

However, the interest rate a borrower will pay depends on a range of factors such as credit history, the type of vehicle they buy, the loan term and down payment.

“Gradual hikes this year will lower consumers' willingness to borrow at high interest rates,” Mr Valecha said.

Abu Dhabi, United Arab Emirates, July 31, 2012:  
UAE dirhams. (Silvia Razgova / The National)


The historically low interest rates over the past few years have affected savings accounts. But following the UAE Central Bank's rate increase on Wednesday, consumers can expect a marginal increase that will boost their savings power.

“However, putting extra money into your savings might not result in as much interest earned from other avenues,” Mr Valecha said.

“Investors can use the higher interest rates as an incentive to boost their savings or emergency fund contributions.”

While traditional banks might be slower to pass on the rate rise to savers, consumers could look at other ways to boost their savings power, Mr Shaheen of Seven Capitals said.

“Online banks offering high-yield accounts tend to pay higher rates than traditional banks,” he said.

US Fed chairman Jerome Powell said it was 'very premature' to think about pausing the interest rate increases. AFP

How high can interest rates go?

The Federal Open Market Committee hinted that it could be ready to reduce the size of its rate increases as it looks to bring inflation back down to 2 per cent.

Fed chairman Jerome Powell said no decision had been made on whether December's meeting will bring a fifth consecutive rise of 75 bps but argued it was “very premature” to think about pausing the increases.

“In addition to higher rates, the Fed will also start to run down its balance sheet at a monthly pace of $95 billion, helping to tighten liquidity conditions further,” Emirates NBD said in a research note.

In April, the Economist Intelligence Unit forecast a total increase of 225 bps this year.

Abu Dhabi, UAE - May 29, 2008 -  Carrefour Shoppers in Marina Mall. (Nicole Hill / The National) 
grocery store

When will consumers feel the pinch?

In the short term, consumers may feel the sting of higher prices more acutely than the pinch of interest rate rises, Mr Valecha said.

But as the Fed continues its rate increase programme throughout the year, consumers will begin to feel the effect, he said.

“Eventually, higher rates will help cool down inflation, which will benefit consumers in the long run.”

Updated: November 04, 2022, 7:36 AM