In 2024, UAE consumers will pay less to borrow money as interest rates are expected to decrease by 100 basis points.
The US Federal Reserve and the Central Bank of the UAE (CBUAE) are expected to lower interest rates on personal loans, mortgages, car financing, and credit cards next year as inflation drops in the world's largest economy.
UAE's currency is pegged to the US dollar. As a result, the central bank tends to mirror the Fed’s stance on monetary policy. In other words, when the Fed cuts rates next year, the UAE is expected to follow suit.
In this month's final meeting of the year, the Federal Reserve held interest rates steady at a 22-year high between 5.25 and 5.50 percent.
In line with the Fed's decision, the UAE Central Bank also kept the Overnight Deposit Facility's Base Rate unchanged at 5.40 per cent. Additionally, the regulator maintained the interest rate on short-term borrowing from the CBUAE at 50 basis points above the Base Rate.
To contain multidecade-high inflation in the US, interest rates have consistently increased in the UAE and the US after the pandemic.
2024: 50-100 bps rate cut?
According to Steven Rees, head of investments at JP Morgan Private Bank for the Middle East and North Africa, US policymakers are now penciling in a 75bps rate cut in total next year, supported by a rosy outlook for an economy that can avoid a recession.
Inflation is likely to settle and price pressures are abating, and the Fed's own forecasts point to a durable path toward 2 percent inflation. We also think that with the Fed now on the verge of cutting, and potentially sooner rather than later,” he said.
Market analyst Rania Gule, of XS.com, believes the Fed will keep interest rates unchanged until the first half of 2024, followed by a 50-100 basis point rate cut with core inflation readings influencing future policy decisions.
Vijay Valecha, chief investment officer, Century Financial, said that 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 drop, although not necessarily by the same amount.
In other words, lower interest rates mean 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.
Rates drop faster for short-term loans
According to Century Financial CIO, the impact of lower interest rates on consumers depends on whether their borrowing is short-term or long-term.
Credit cards and auto loans are short-term loans based on 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.
The mortgage
In the UAE, mortgage rates are linked to the Emirates Interbank Offered Rate (Eibor) index, which is influenced by the Fed funds target rate in the US. The Eibor also serves as a benchmark for personal loans and car loans. For mortgage loans in the UAE, fixed rates typically apply for a period of up to five years, before a variable rate is applied.
As mortgage rates fall, monthly payments would be reduced, purchasing power would increase, and refinancing on existing mortgages would be easier. Additionally, it would increase housing demand and affordability," added Valecha.