The Central Bank of the United Arab Emirates (UAE) raised its Base Rate for the Overnight Deposit Mechanism by 25 basis points on Wednesday, bringing it to 3.90%. This decision followed the expected quarter-point interest rate hike by the US Federal Reserve.
This move aligns with the UAE's long-standing policy of pegging key rates to US rates, which is driven by the dirham's peg to the dollar. This system helps maintain monetary stability and currency competitiveness.
According to Vijay Valechi, Chief Investment Officer at Century Financial, the Fed's decision was largely predictable after a three-year hiatus in action. He noted: 'The dirham is pegged to the dollar, so the UAE Central Bank usually follows the Fed in changing its Base Rate.'
The Base Rate, previously at 3.65%, serves as a benchmark for overnight money market rates, and the interbank benchmark EIBOR closely correlates with it.
Valechi suggested that the rate hike will likely affect the cost of floating-rate mortgages and corporate borrowing costs. He added that rising rates increase interest rates across the entire system, which could raise expenses for companies already facing higher energy and freight prices.
Madhur Kakkar, founder and CEO of Elevate Financial Services, had predicted this move even before the Fed's announcement, stating that the 25 basis point increase would raise the UAE Base Rate from 3.65% to 3.90%. He emphasized that due to the dirham's peg to the US dollar, the UAE Central Bank would likely closely follow this step.
Kakkar also reported that the impact on consumers will be gradual. He believes that depositors will notice improved returns on savings and term deposits sooner than borrowers will face increased loan repayment costs. In his estimation, a 25 basis point increase on a 1.5 million dirham mortgage over 25 years would add about 210 dirhams to monthly payments, or approximately 2,500 dirhams annually.
Analysts agree that markets will now focus on future Fed policy and whether regulators will maintain a high-interest-rate stance for an extended period until 2027.
