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The UAE will have to go through a long period of increased interest rates

The UAE will have to go through a long period of increased interest rates

9 October 2023

According to economists, in the near future, the UAE and the Gulf countries will have to go through a long period of increased interest rates.

The central banks of the Persian Gulf countries have been raising interest rates in parallel with the increase in the key rate by the US Federal Reserve System (FRS) over the past few years, due to the attempts of the US Central Bank to reduce the inflation rate, which has reached its multi-year maximum.

The UAE and other Gulf countries are following the change in the Fed’s key rate, as their currencies are pegged to the US dollar. The Central Bank of the UAE has decided to keep the base rate applicable to the overnight deposit at 5.40%, starting from Thursday, September 21, 2023.

The UAE Central Bank raised the rates last time on July 26 by 25 basis points from 5.15 per cent to 5.40 per cent following the US Federal Reserve Board’s announcement to increase the Interest on Reserve Balances (IORB) by 25 basis points.

Oxford Economics reports that the Fed recently suspended the rate hike cycle, giving the Gulf countries a pause, whose interest rates have reached the highest level in more than 20 years.

Scott Livermore, chief economist for the Middle East at Oxford Economics, noted, “However, inflation is rising once more, so we cannot rule out another Fed rate hike before the end of 2023, which could force the dollar-pegged nations to adapt accordingly until a strategy to cut rates is gradually rolled out. The Central Bank of the UAE kept its rate at 5.4 percent this week, and we expect other GCC banks will follow suit.”

Livermore added, “We think the GCC countries will have to become accustomed to an extended period of higher interest rates. As expected, the US Federal Reserve left policy rates unchanged at its latest meeting, but it hasn’t ruled out further rate hikes.”

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    ARAVANA Capital management
    9 October 2023
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