Prepare to pay higher interest rates on your UAE loans as early as March

A rise in US interest rates will be reflected in UAE lending rates, as the Central Bank of the United Arab Emirates (CBUAE) typically adjusts domestic interest rates in parallel with US rates.
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Dubai: Federal Reserve Chairman Jerome Powell at his confirmation hearing on Tuesday said he would not hesitate to raise interest rates to curb inflation.

A rise in US interest rates will be reflected in UAE lending rates, as the Central Bank of the United Arab Emirates (CBUAE) typically adjusts domestic interest rates in tandem with US rates to avoid market volatility. currencies and speculation against the dirham in the context of the crisis. The anchoring of the currency of the United Arab Emirates to the dollar.

Even before Powell’s confirmation that the Fed was moving forward with a rate hike plan, the CBUAE had hinted that a rate hike might be imminent.

In its latest quarterly economic review, the central bank said the UAE’s CPI inflation rate turned positive in the third quarter of 2021, for the first time since the fourth quarter of 2018, to 0.6% in year-over-year. The CBUAE expects that while domestic inflation will remain subdued, global price pressures and the Fed’s decision to curb US inflation should push interest rates up.

“Rising inflation is expected to cause the federal funds rate to rise, which would lead to an increase in the base rate of the CBUAE applicable to the Overnight Deposit Facility (ODF), which provides an interest rate effective floor for overnight money market rates in the United Arab Emirates. “Said the central bank.

Borrowers face higher costs

A rise in interest rates would impact the cost of funds for banks and borrowers, resulting in higher funding costs at all levels.

Individuals and businesses who have fixed rate loans will benefit if their rates are locked in for the life of the loan. Those with flexible rate loans will see their interest charges rise immediately as the Fed decides to raise rates.

Although the Fed chairman has given no indication of when the rate hikes will start, investors are betting the Fed will start raising its benchmark federal funds rate in March to 4 hikes this year, two years later. brought it down to near zero at the start of the pandemic in March 2020. In December, Fed officials said they would speed up the end of their asset purchase program and plan to raise rates three times this year.

“Powell noted that the Fed could raise rates to curb inflation. What he didn’t say was also important. It hasn’t supported four rate hikes in 2022, nor a start to a rate hike in March, ”said Jeffrey Halley, senior market analyst, Asia-Pacific, OANDA.

UAE banks will benefit

Rising interest rates will significantly boost the profitability of the UAE banking sector, which has suffered prolonged margin squeeze due to low interest rates.

With rising interest rates, UAE banks’ net interest margins (NIMs) are expected to improve. NIM is a measure comparing the net interest income that a bank / financial firm generates from credit products such as loans and mortgages, with the outgoing interest that it pays to depositors and other sources. funding.

The impact of higher interest rates will trickle down fairly quickly to banks’ income statements as rate hikes take effect almost immediately on lending and the impact on deposit rates could be lower and with a lag. .

Financing and liquidity

Although the cost of financing banks is likely to increase, most banks in the UAE are well capitalized and have adequate funding. Taking advantage of the low interest rates over the past two years, most banks have set up their fundraising activities.

In addition, most UAE banks have a significant share of CASA (Current Account and Savings Account) in their funding mix and in some cases it can be as high as 50% giving them clear coverage. against an immediate increase in the cost of funds.

The rate of advances on stable resources (ASRR) of the banking system fell from 77.7% at the end of June 2021 to 77.9% at the end of September 2021, indicating that the structural financing of the banking sector remains solid. With a loan-to-deposit (LTD) ratio for the entire banking system at 91.5% at the end of the third quarter due to the higher growth in deposits compared to loans, banks are amply liquid.

In addition, the central bank assured that it would monitor economic and financial developments and the liquidity situation of banks operating in the UAE to meet the financing needs of the private sector. The CBUAE reaffirmed in the third quarter of 2021 its continued commitment to support economic recovery through the Targeted Economic Support Program (TESS) and confirmed that the withdrawal of the emergency measures introduced in response to the pandemic will be gradual and timely. .

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