Analysts say interest rates charged on personal loans, mortgages, car financing and credit cards are set to decline next year as the US Federal Reserve and the Central Bank of the UAE (CBUAE) will cut rates amidst a drop in inflation in the world’s largest economy.

The UAE has pegged its currency to the US dollar. As a result, the central bank tends to mirror the Fed’s stance on monetary policy. Therefore, whenever the Fed will cut rates next year, it’s expected the UAE will follow suit.

Fed held interest rates steady at a 22-year peak between 5.25 and 5.50 per cent in the final meeting of the year this month.

Similarly, the UAE Central Bank also kept the Base Rate applicable to the Overnight Deposit Facility unchanged at 5.40 per cent in line with the Fed decision. The regulator also maintained the interest rate applicable to borrowing short-term liquidity from the CBUAE at 50 basis points above the Base Rate for all standing credit facilities.

Interest rates have been consistently on the rise in the UAE and the US after the pandemic in order to rein in multi-decade-high inflation in the US.

50-100 bps rate cut in 2024?

Steven Rees, head of investments for the Middle East and North Africa at JP Morgan Private Bank, said the US policymakers are now pencilling in more rate cuts than expected at 75bps in total next year, supported by a rosy picture of an economy that can avoid a recession.

“We believe that inflation will likely settle and that price pressures are abating, and the Fed’s own forecasts show a durable path towards its 2 per cent inflation target. We also think that with the Fed now on the verge of cutting, and potentially sooner rather than later,” he said.

Rania Gule, market analyst at XS.com, believes that the Fed will keep interest rates unchanged until the first half of 2024, followed by a 50 to 100 basis points rate cut with core inflation reading expected to influence the Fed's future policy decisions.

Vijay Valecha, chief investment officer, Century Financial, said the decline in interest rates would have a direct impact on UAE consumers because when the central bank lowers interest rates, the rates charged on personal loans, mortgages, and credit cards also tend to decline, although not necessarily by the same amount.

“Thus, lower interest rates imply lower borrowing costs for consumers. They also benefit existing borrowers with variable interest rates by allowing them to refinance their loans at lower interest rates,” he said.

Short-term rates drop faster

Century Financial CIO elaborated that the impact of lower interest rates on consumers depends on whether their borrowing is tied to short-term or long-term rates.

“Short-term loans like credit cards and auto loans are tied to short-term rates. Short-term rates tend to decline faster than long-term rates in the event of rate cuts. Meanwhile, lower interest rates imply a lower return on personal finances like savings, deposits, and money market accounts. However, investors can lock in high rates for longer by increasing the time horizon for which they’ve parked their funds in these instruments before banks start slashing rates,” added Century Financial’s chief investment officer.

Mortgage

Mortgage rates in the UAE are linked to the Emirates Interbank Offered Rate (Eibor) index, which is in turn influenced by the Fed funds target rate in the US. The Eibor also serves as a benchmark for personal loans and car loans. Mortgage loans in the UAE are typically charged at a fixed rate for durations ranging from 1 to 5 years, before transitioning to a variable rate that is pegged to the Eibor.

“Lower mortgage rates would mean reduced monthly payments, higher purchasing power, and better refinancing opportunities on existing mortgages. Moreover, it would also enhance housing demand and affordability,” added Valecha.

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