The Effects of Increase in Interest Rates in UAE

21 Dec 2018

The central bank of the UAE recently increased borrowing rate so the short-term liquidity has been increased by 25 bps. After this, the cost of borrowing has been increased not only in the UAE but also in all of the GCC countries. On this Thursday the 20th December 2018 the rates were amplified in the line with United States Federal Reserve. After the meeting of the United States Federal Reserve on Wednesday, the Federal Reserve authorities and officials made the decision to increase the prices by 25 points. In response to that the central bank of UAE decided to escalate the interest rates too. These rates were useful for the issuance of its certificate of deposits with an increase in interest rate of US dollars. This news was revealed by the Apex bank later on the same day of the meeting.  


An increase in interest rates in UAE:

You can say that the certificate of deposits are monetary policy, with which the monetary authority controls the long and short term borrowing from and within the country. These certificates were given to the banks by the monetary authority, which is usually the central bank and in this case, it was the UAE central bank. With these, the changes in the interest and borrowing rates are increased or decreased. This recent increase in rates from the Federal Reserve was the fourth time this year. Because of the increase, lending rates reached from 2.25 to 2.50 percent just overnight. A few days back UAE also cleared a huge transaction with China.

All of the central banks and the authorities in the region of GCC increased the rates just like the UAE, with the exception of Kuwait. According to the economists, there will be more increase in interest rates, of this sort however these are expected to be in the coming year. The good news is that only two more hikes are expected as the message from the chairman of Federal Reserve Jerome Powell, was clear, it stated that the economy of US performs well and will continue to do so. So, they do not need any support from the Fed in any way. Even if they are offering low-interest rates, lower than normal or even if they are maintaining a gigantic balance sheet.

According to Timothy Fox who is a research and chief economist at the Emirates NBD Research, FED has cut down its growth and inflation forecasts and after these, they also lowered the dot plot. This all is done so that the hikes in 2019 become two instead of three. He also mentioned that by the end of next year the fund rate of Fed will be at lowered from 3.1 to 2.9 percent in 2019 and next year it will decrease from 3.4 percent to 3.1. At Emirates NBD Research, fixed income research head, Anita Yadav reported that most of the floating rate loans use EIBOR as their base rates. EIBOR is the daily reference rate as offered by the Emirates Interbank. The loan rates of these are less likely to jump as high as the magnitude of policy. Moreover, she added that in these times of rising rates of interest it would only make sense if you would explore the option of making the interest rates fixed. Changing the type of loan tenures to make the interest expense lowest, this could also be added to it otherwise it is a good alternative, she told the news on Thursday, the day after the meeting.


Increasing interest rates all over

Central Bank of Bahrain has increased its major policy interest rates locally 2.50 percent to 2.75 percent, on its one-week deposit facility. This is not just it, they have also increased its overnight deposit rate. As of now, it is 2.5 percent, which earlier was as low as 2.25 additionally 4.5 is the new lending rate which was also 4.25 before this increase. However, the one-month deposit rate is still the same and it is expected to remain that way on 3.25 percent. On the other hand, Saudia’s central bank is raising the policy rates so that they could preserve its monetary stability. So, the repo rate has now increased from 3 percent. Reverse repo rate is also increased to 2.5 percent. These rates were 2.75 and 2.25 percent before [respectively].

In the meantime, the central bank of Kuwait said that they have decided that the discount rates will not be changed and it will remain at 3 percent. The interest rate climb merely has any impact on the prices of Assets. This jump was already anticipated so it does not matter that much, said the chief of a market strategist at FXTM Hussein Syed. He added that markets are not convinced with this economic assessment. Investors are in lots of bouts regarding their future in this business and the growth of the future. It is clear in the bonds market 10-2 year spread that it will be falling below 10 basis point on Thursday.

If in any case, this prediction of the bonds market is correct; along with that if the Federal Reserve continues to make its policies stricter and not go at a slow pace then this would cause an economic slowdown. Eventfully it will be a bad effect for oil prices in and outside the region. Then it will require even more cuts if they want to make the balance in markets. Slowly climbing of interest rates and the highly unpredictable equity markets, these are the two factors from which gold prices are getting benefits. Recently UAE has made new rules check out this new law for online posts in UAE.