After the US Federal Reserve aggressively hiked its key interest rate to combat inflation and restore price stability, the UAE Central Bank boosted its benchmark borrowing rate.
The Fed raised the policy rate for a fourth consecutive time by75 basis points as it aims to bring inflation down from a four-decade high towards its target range of 2 percent. This is the sixth rate increase this year.
The world’s largest economy returned to growth after two consecutive quarters of falling output but recession fears loom and job creation continues apace, with total vacancies exceeding the number of unemployed Americans.
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 consumer price index (CPI) increased by 3.4 percent during the first quarter of 2022, compared with 0.6 percent and 2.3 percent in the third and fourth quarters of 2021, respectively.
Inflation in the Emirates is projected to reach 5.6 percent in 2022, according to the Central Bank.
Last month, the International Monetary Fund warned of a global cost of living crisis as the world economy continues to be affected by the war in Ukraine, broadening inflation pressures and a slowdown in China.
The fund maintained its global economic estimate for this year at 3.2 percent, after a 6 percent expansion in 2021, but cut the 2023 forecast to 2.7 percent — 0.2 percentage points lower than the July forecast.
Global inflation is forecast to rise to 8.8 percent in 2022, from 4.7 percent in 2021, before declining to 6.5 percent in 2023, the fund said.
The stronger dollar has increased the price of imports and food costs globally, with rising inflation prompting higher interest rates from central banks around the world as they tighten monetary policy to restore price stability.
Surging oil and gas prices, exacerbated by Russia’s war in Ukraine, have also stoked the already rising inflation.
Brent, the benchmark for more than two thirds of the world crude, rose to a notch under $140 a barrel in March. It is down about 30 percent from its highs in June and is trading above $90 a barrel.
The impact of higher energy prices and shrinking consumer spending power on economic growth has also hit US stocks, plunging markets into bear territory.
The Russia-Ukraine conflict has exacerbated the coronavirus-induced slowdown, upending commodity markets and disrupting global trade, which will keep food and energy prices at “historically high levels” until 2024, the World Bank said in May.
MENA economies are set to expand by 5.5 percent this year, their fastest pace since 2016, with the region’s oil-exporting countries benefitting from high hydrocarbon prices, according to the World Bank.
GCC economies are projected to grow 6.9 percent in 2022, driven by high oil prices, as well as higher growth rates in non-oil sectors.
Despite global headwinds, the UAE economy is set to expand by an annual 5.4 percent this year, after growing 3.8 percent in 2021, according to the Central Bank.
The Arab world’s second-largest economy is set to post its strongest annual expansion since 2011 after it grew by 8.4 percent in the first three months of this year on higher oil prices and measures to mitigate the impact of the pandemic.
Emirates NBD forecasts that the economy will expand by 7 percent in 2022 while First Abu Dhabi Bank projects a 6.7 percent expansion and Abu Dhabi Commercial Bank estimates a growth of 6.2 percent.
Advanced economies are expected to grow by 2.4 percent this year, compared with an earlier 2.5 percent estimate, after expanding by 5.2 percent in 2021, according to the IMF. They are forecast to expand by 1.1 percent in 2023.
The largest of the group, the US, is expected to expand by 1.6% instead of the earlier projection of 2.3% and is expected to rise by 5.7% last year.
UAE Central Bank boosts interest rates in response to the Fed’s fourth straight 75 bps increase
Previous ArticleUAE’s unemployment insurance programme starts on January 1st