UAE consumers may soon benefit from cheaper loans

Consumers in the UAE can anticipate significant relief as lending rates are likely to decrease soon, according to experts. This outlook emerged after the US Federal Reserve maintained its key benchmark rate within the 5.25% to 5.50% range, a level unchanged since July 2023. With the UAE dirham pegged to the US dollar, the UAE central bank also kept their Emirates Interbank Offered Rates (EIBOR) overnight deposit facility steady at 5.40% and maintained the borrowing short-term liquidity rate at 50 basis points above the base rate.

The UAE's Base Rate, linked to the US Federal Reserve’s interest on reserve balances (IORB), serves as an effective floor for overnight money market interest rates in the UAE. Major GCC central banks align their policies with the Fed’s rate to maintain their currency pegs, except for Kuwait, which uses a basket of currencies. Fed Chair Jerome Powell noted that potential interest rate cuts would be discussed at the next Federal Open Market Committee (FOMC) meeting in September. If the Fed reduces its rate, the EIBOR rate in the UAE could drop to around 5% over the next three months, providing substantial relief to consumers and businesses.

Vijay Valecha, chief investment officer at Century Financial, emphasized that a rate cut by the Fed would significantly benefit the UAE's consumer sector, preventing further increases in lending rates for auto loans, credit cards, and personal loans. Lower rates would also enable state-owned enterprises and infrastructure players to leverage their credit limits more effectively, utilizing debt at reduced costs and potentially refinancing at lower rates. This is particularly pertinent given the UAE's estimated $500 billion construction project pipeline over the next five years, covering core infrastructure, housing, roads, and non-oil economy diversification sectors like hospitality and tourism. Reduced debt costs would foster increased credit uptake and spending, further stimulating economic growth.