In a significant monetary policy shift, the UAE central bank announced on Wednesday that it has reduced the base rate for the overnight deposit facility (ODF) by 50 basis points, bringing it down from 5.40% to 4.90%, effective Thursday, September 19. This decision aligns with the recent actions taken by the U.S. Federal Reserve, which also cut interest rates by half a percentage point on the same day, citing increased confidence regarding inflation trends.
The reduction in the UAE’s base rate comes as part of a broader response to the Federal Reserve’s easing of monetary policy, which is seen as a measure to address rising concerns about the job market. Given that the UAE dirham is pegged to the U.S. dollar, the UAE often follows the Federal Reserve’s lead in adjusting its interest rates.
With this decrease, borrowing costs across the UAE are expected to decline, making personal loans, mortgages, car loans, and credit cards more affordable.
This could result in lower monthly payments for consumers, enhancing their purchasing power.
Experts predict that mortgage rates may further decrease in 2024, potentially facilitating home ownership and invigorating the real estate sector. Existing borrowers might also find opportunities to refinance at more favorable rates.
In their statement, U.S. policymakers expressed that “the committee has gained greater confidence that inflation is moving sustainably toward 2 percent, and judges that the risks to achieving its employment and inflation goals are roughly in balance.” However, Governor Michelle Bowman dissented, advocating for a more conservative quarter-percentage-point reduction. The Fed anticipates additional cuts, projecting a half-point decrease by the end of this year, with further adjustments expected in subsequent years.
Despite inflation being “somewhat elevated,” the Fed decided to lower the overnight rate to a target range of 4.75% to 5.00%, recognizing the recent progress made on inflation and weighing the balance of risks involved. The Fed has indicated a readiness to modify its monetary policy as needed to ensure the achievement of its goals related to stable prices and maximum employment.
As the Fed’s latest meeting occurred just before the upcoming U.S. presidential election on November 5, questions about the strategy behind the rate cuts remain. Observers are keen to understand whether the aggressive initial cut is aimed at addressing the rapid decline in inflation or responding to potential weaknesses in the job market that could hinder progress toward the Fed’s inflation target of 2%.
Current projections suggest inflation will end this year at about 2.3%, with expectations of a further decrease to 2.1% by 2025. The unemployment rate is anticipated to rise slightly to 4.4% by year-end, while economic growth is forecasted at 2.1% through 2024 and 2% the following year, reflecting continuity in economic performance from earlier projections.
