This week, borrowing costs in the UAE are anticipated to decrease as both the US Federal Reserve and the Central Bank of the UAE (CBUAE) are expected to lower interest rates. This move will make it more cost-effective for consumers to secure personal, auto, and mortgage loans. Given the dirham's peg to the dollar, the UAE is likely to align its interest rate cut with that of the US following the September 18 meeting. This will mark the first reduction in interest rates in the past three years. The UAE last adjusted its interest rates between mid-2019 and mid-2021, mirroring the US Federal Reserve's policy to soften monetary measures in response to the economic impact of the coronavirus.
The most recent change in UAE monetary policy occurred on July 27, 2023, when the CBUAE raised interest rates by 25 basis points from 5.15 percent to 5.40 percent, following a similar increase by the US Fed. Analysts widely predict that central banks will cut rates by 50 basis points on Wednesday. Vijay Valecha, chief investment officer at Century Financial, noted that the UAE is likely to follow the Fed's lead, which is expected to cut rates by 50 basis points with a 67 percent probability according to the CME FedWatch tool. George Pavel, general manager at Capex.com Middle East, also suggested that the UAE Central Bank could adopt the same cut size.
Mazen Salhab, chief market strategist for Mena at BDSwiss, highlighted that a 25 basis point cut is seen as a balanced approach to stimulate the economy while maintaining market stability, though there is a significant possibility of a larger 50 basis point cut. For consumers, this means that interest rates on personal loans, mortgages, car loans, and credit cards are likely to decrease, leading to lower monthly payments and increased purchasing power. Mortgage rates are expected to be lower in 2024, potentially making home buying more accessible and boosting the real estate market. Existing borrowers may also have the opportunity to refinance at lower rates.
Valecha emphasized that a reduction in interest rates results in lower costs for various products, including credit cards, mortgages, and personal loans, which is particularly impactful for mortgages. Pavel added that interest rate cuts could lead to a decline in rates for new personal and mortgage loans and loans with variable rates, benefiting borrowers with cheaper loans and lower interest rates for refinancing existing loans. Existing borrowers with variable interest rate debt can take advantage of falling rates, resulting in lower monthly payments.
Salhab noted that interest rates on monthly payments will likely decrease automatically for borrowers with variable rates, while those with fixed-rate loans may benefit from refinancing at lower rates. With interest rates expected to decline multiple times in the coming months and a strong local economy, the UAE could see increased demand for personal and mortgage loans and other forms of financing. Lower financing costs could drive more consumption and investment in real estate, which remains an attractive asset class.
