Car financing, mortgages, and credit cards are set to be cheaper in the UAE in 2024, as the country follows the US’s lead in terms of interest rates. This is good news for consumers who want to borrow money or refinance their existing loans, but it could also have some negative implications for the banking sector and the economy.
The link between the UAE and the US
The UAE has pegged its currency, the dirham, to the US dollar since 1997. This means that the exchange rate between the two currencies is fixed, and the UAE has to adjust its monetary policy in line with the US. The main advantage of this arrangement is that it provides stability and confidence for investors and traders, as they do not have to worry about currency fluctuations or exchange rate risks. The main disadvantage is that the UAE loses some control over its domestic monetary conditions, and has to cope with the spillover effects of the US’s policy decisions.
One of the most important policy decisions that affects the UAE is the interest rate set by the US Federal Reserve, the central bank of the US. The interest rate is the price of money, and it influences the cost and availability of credit in the economy. When the Fed raises interest rates, it makes borrowing more expensive and saving more attractive, which tends to slow down economic activity and inflation. When the Fed lowers interest rates, it makes borrowing cheaper and saving less attractive, which tends to stimulate economic activity and inflation.
The UAE Central Bank (CBUAE) usually follows the Fed’s interest rate movements, as it has to maintain the peg between the dirham and the dollar. The CBUAE sets the base rate, which is the interest rate that banks pay to deposit money with the central bank overnight. The base rate also affects the interest rate that banks charge to lend money to each other and customers. The CBUAE also sets the interest rate that banks pay to borrow money from the central bank for short-term liquidity needs.
The outlook for 2024
The Fed held interest rates steady at a 22-year peak between 5.25 and 5.50 percent in the final meeting of the year this month. However, the Fed indicated that it is likely to cut interest rates by 75 basis points in 2024, as it expects inflation to moderate and the economy to avoid a recession. The Fed’s outlook is based on the assumption that the Omicron variant of the coronavirus will not cause significant disruptions to the economic recovery, and that the fiscal and monetary stimulus measures implemented during the pandemic will continue to support growth and employment.
The CBUAE also kept the base rate unchanged at 5.40 percent in line with the Fed decision. However, the CBUAE is expected to mirror the Fed’s rate cuts in 2024, as it has to maintain the currency peg and the competitiveness of the UAE’s financial sector. This means that the base rate could fall to 4.65 percent by the end of 2024, which would be the lowest level since 2018.
The impact on consumers and banks
The decline in interest rates would have a direct impact on UAE consumers and banks, as it would affect the cost and availability of credit in the economy. The main beneficiaries of lower interest rates would be the borrowers, who would see their interest payments reduced and their disposable income increased. This would apply to both existing borrowers with variable interest rates, who could refinance their loans at lower rates, and new borrowers, who could access cheaper credit. The main types of loans that would become more affordable are personal loans, mortgages, car financing, and credit cards.
Lower interest rates would also benefit UAE banks, as they have a large proportion of deposits that bear no or limited interest, such as current accounts and savings accounts. This means that their cost of funds would not increase as much as their interest income, which would improve their net interest margin and profitability. Moreover, UAE banks have a net external asset position, which means that they have more assets than liabilities denominated in foreign currencies, mainly the US dollar. This means that they would not suffer from lower and more expensive global liquidity, as they could rely on their own sources of funding.
However, there could also be some negative effects of lower interest rates, such as:
A higher cost of risk, as some borrowers could default on their loans due to lower income or higher expenses. This could be the case for some retail customers who work in sectors that are affected by the pandemic, such as tourism, hospitality, and aviation, or for some small and medium enterprises (SMEs) that face lower demand or higher competition. The CBUAE has introduced several measures to support these borrowers, such as allowing banks to defer loan payments, waive fees, and restructure loans. However, these measures are temporary and may not be enough to prevent some defaults and losses for the banks.
A higher cost of funding, as some deposits could migrate from no- or low-interest products to interest-bearing products, such as fixed deposits, bonds, and mutual funds. This could happen if some customers seek higher returns on their savings, or if some customers perceive lower interest rates as a sign of lower confidence in the economy or the currency. The CBUAE has tried to prevent this by offering a zero-cost facility to banks and finance companies, which allows them to access funds from the central bank without paying any interest. However, this facility is also temporary and may not be sufficient to meet the funding needs of the banks.
A slowdown in loan growth, as demand for credit could weaken due to lower economic activity or higher competition. This could happen if some customers postpone or cancel their borrowing plans, such as buying a house, a car or a consumer good, due to uncertainty or pessimism about the future. Alternatively, this could happen if some customers switch to other sources of credit, such as fintech platforms, peer-to-peer lending or Islamic finance, which could offer more attractive or innovative products and services. The CBUAE has tried to stimulate loan growth by reducing the reserve requirements for banks, which frees up more funds for lending. However, this may not be enough to overcome the demand and supply factors that affect the credit market.
The conclusion
In conclusion, loans are set to cost less in the UAE in 2024, as the country follows the US’s lead in terms of interest rates. This is good news for consumers who want to borrow money or refinance their existing loans. Still, it could also have some negative implications for the banking sector and the economy. The CBUAE will have to balance the benefits and risks of lower interest rates, and monitor the developments in the domestic and global markets, to ensure the stability and growth of the UAE’s financial system.
Car financing, mortgages, and credit cards are set to be cheaper in the UAE in 2024, as the country follows the US’s lead in terms of interest rates. This is good news for consumers who want to borrow money or refinance their existing loans, but it could also have some negative implications for the banking sector and the economy.
The UAE has pegged its currency, the dirham, to the US dollar since 1997. This means that the exchange rate between the two currencies is fixed, and the UAE has to adjust its monetary policy in line with the US. The main advantage of this arrangement is that it provides stability and confidence for investors and traders, as they do not have to worry about currency fluctuations or exchange rate risks. The main disadvantage is that the UAE loses some control over its domestic monetary conditions, and has to cope with the spillover effects of the US’s policy decisions.
One of the most important policy decisions that affects the UAE is the interest rate set by the US Federal Reserve, the central bank of the US. The interest rate is the price of money, and it influences the cost and availability of credit in the economy. When the Fed raises interest rates, it makes borrowing more expensive and saving more attractive, which tends to slow down economic activity and inflation. When the Fed lowers interest rates, it makes borrowing cheaper and saving less attractive, which tends to stimulate economic activity and inflation.
The UAE Central Bank (CBUAE) usually follows the Fed’s interest rate movements, as it has to maintain the peg between the dirham and the dollar. The CBUAE sets the base rate, which is the interest rate that banks pay to deposit money with the central bank overnight. The base rate also affects the interest rate that banks charge to lend money to each other and customers. The CBUAE also sets the interest rate that banks pay to borrow money from the central bank for short-term liquidity needs.
The Fed held interest rates steady at a 22-year peak between 5.25 and 5.50 percent in the final meeting of the year this month. However, the Fed indicated that it is likely to cut interest rates by 75 basis points in 2024, as it expects inflation to moderate and the economy to avoid a recession. The Fed’s outlook is based on the assumption that the Omicron variant of the coronavirus will not cause significant disruptions to the economic recovery, and that the fiscal and monetary stimulus measures implemented during the pandemic will continue to support growth and employment.
The CBUAE also kept the base rate unchanged at 5.40 percent in line with the Fed decision. However, the CBUAE is expected to mirror the Fed’s rate cuts in 2024, as it has to maintain the currency peg and the competitiveness of the UAE’s financial sector. This means that the base rate could fall to 4.65 percent by the end of 2024, which would be the lowest level since 2018.
The decline in interest rates would have a direct impact on UAE consumers and banks, as it would affect the cost and availability of credit in the economy. The main beneficiaries of lower interest rates would be the borrowers, who would see their interest payments reduced and their disposable income increased. This would apply to both existing borrowers with variable interest rates, who could refinance their loans at lower rates, and new borrowers, who could access cheaper credit. The main types of loans that would become more affordable are personal loans, mortgages, car financing, and credit cards.
Lower interest rates would also benefit UAE banks, as they have a large proportion of deposits that bear no or limited interest, such as current accounts and savings accounts. This means that their cost of funds would not increase as much as their interest income, which would improve their net interest margin and profitability. Moreover, UAE banks have a net external asset position, which means that they have more assets than liabilities denominated in foreign currencies, mainly the US dollar. This means that they would not suffer from lower and more expensive global liquidity, as they could rely on their own sources of funding.
However, there could also be some negative effects of lower interest rates, such as:
In conclusion, loans are set to cost less in the UAE in 2024, as the country follows the US’s lead in terms of interest rates. This is good news for consumers who want to borrow money or refinance their existing loans. Still, it could also have some negative implications for the banking sector and the economy. The CBUAE will have to balance the benefits and risks of lower interest rates, and monitor the developments in the domestic and global markets, to ensure the stability and growth of the UAE’s financial system.