The US Federal Reserve is likely to lower interest rates for the first time in three years. The US Federal Reserve and the Central Bank of the UAE (CBUAE) are widely expected to lower interest rates this week, which will lower borrowing costs and make it more affordable for customers to secure mortgage, vehicle, and personal loans.
Given that the dirham is dollar-pegged, following the September 18 meeting, the UAE would probably lower interest rates in line with the US.
The interest rates will be lowered for the first time in the last three years. Interest rates were lowered in the UAE between the middle of 2019 and the middle of 2021 in accordance with US Federal Reserve policy. In order to mitigate the effects of the coronavirus on the economy, central banks during this time implemented a more accommodating monetary policy.
The CBUAE hiked interest rates by 25 basis points, from 5.15 percent to 5.40 percent, on July 27, 2023, the last time the UAE’s monetary policy was altered. This came after the US Fed Fund rate increased by 25 basis points the day before.
How big of a rate drop is anticipated?
Most analysts predict that on Wednesday, central banks will lower interest rates by 50 basis points.
The CME FedWatch tool indicates that there is a 67% probability that the Fed will drop rates by 50 basis points, and the UAE will most likely follow suit. The odds of 25 basis points have decreased to 33 percent from 66 percent a week earlier, according to Century Financial Chief Investment Officer Vijay Valecha.
The UAE Central Bank might use the same cut size, according to George Pavel, general manager of Capex.com Middle East.
“As a result of the US economy’s current trajectory and growing concerns about its strength, markets are pricing in a 50 basis point cut, despite expectations having been continuously fluctuating between both alternatives (25 bps and 50 bps). But ultimately, markets will stay focused on the Fed, its economic projections, and its decision,” he said.
According to Mazen Salhab, chief market strategist for Mena at BDSwiss, a 25 bps reduction is viewed as a sensible step that would stimulate the economy and preserve market stability. However, there is a good chance of a bigger 50 bps drop.
Advantage for customers
Salhab believes that since interest rates on credit cards, mortgages, auto loans, and personal loans are probably going to drop on Wednesday, borrowing will become more reasonable. Lower monthly payments on new loans could result from this, giving consumers more purchasing power. 2024 is expected to see reduced mortgage rates, which might open up the possibility of home ownership and boost the real estate industry. There might be chances for current borrowers to refinance at cheaper rates.
George Pavel went on to say that interest rate reductions might cause rates on newly issued mortgages, personal loans, and variable-rate loans to drop.
