UAE lowers base rate following US Federal Reserve update

The Central Bank of the UAE (CBUAE) has decided to reduce the base rate applicable to the Overnight Deposit Facility (ODF) by 25 basis points, lowering it from 4.15 per cent to 3.90 per cent. Consumers will benefit from reduced borrowing rates starting Thursday, October 30. This move follows the US Federal Reserve’s rate cut, which reduced the Interest Rate on Reserve Balances (IORB) by 25 basis points. The UAE’s monetary stance is closely influenced by US policy due to the peg between the UAE dirham and the US dollar. The shift aims to maintain currency stability and strengthen investor confidence.

The Federal Open Market Committee (FOMC) reduced its federal rate for the third time in four months on Wednesday, cutting it from 4.00 per cent to 3.75 per cent. The last reduction occurred in September.

The trend of lower rates began in 2022. While the UAE previously raised rates to tackle inflation, this time the central bank has opted to focus on supporting growth and easing economic stress amid cooling global tensions.

The CBUAE’s decision aims to support a softening job market and navigate persistent inflation. The move may also trigger ripple effects across regions and sectors.

Influence on consumers

The rate cut is expected to benefit key sectors such as real estate, tourism, and consumer borrowing. Households are likely to experience relief on monthly loan payments, particularly those with variable-rate loans. Lower interest rates could encourage real estate activity, especially in the mid- to upper-income segments where mortgage demand drives sales.

Reduced financing costs may also motivate first-time buyers who delayed property purchases earlier this year.

Financial experts noted that mortgage holders could benefit from smaller monthly instalments, while personal loan and credit card rates may also ease, making borrowing more affordable.

However, analysts cautioned that the overall impact would remain modest unless the Federal Reserve adopts a more aggressive easing cycle. They said significant rate cuts would be necessary to meaningfully reduce UAE mortgage costs, with current lending rates still ranging between 2.5 per cent and 4.5 per cent.

Influence on businesses

The rate reduction will also influence the business sector. Companies, especially small and medium enterprises (SMEs), are likely to gain from easier financing conditions and improved access to credit, which could support capital investment and expansion.

Investors may show renewed interest in real estate and equities in search of better returns, given lower deposit rates. Developers and investors are expected to focus on sustainable demand rather than short-term market fluctuations.

Lower borrowing costs could also help businesses cope with global economic headwinds while sustaining domestic demand. The central bank, however, is expected to monitor inflation closely to prevent overheating and ensure sustainable growth.

The decision aligns with the broader global easing cycle and reflects confidence in economic stability and inflation management.

Why the UAE aligns with the Fed

The UAE dirham has been pegged to the US dollar at a fixed rate of 1 USD = 3.6725 AED since 1997. As of 2024, 12 countries maintain similar alignments with the US dollar.

This peg demonstrates how the UAE’s monetary policy is influenced by the US Federal Reserve. The fixed exchange rate ensures stability, particularly important for the oil trade, which is priced in US dollars. A stable currency, in turn, boosts investor confidence.

However, it also limits the UAE’s independent monetary policy decisions. Aligning with the Fed’s interest rate changes helps ease pressure on the economy, prevents capital outflows, and maintains currency stability.

The Fed’s latest action comes amid economic uncertainty in the United States, including the impact of trade policies and a partial government shutdown, both of which have weighed on market sentiment.

Expert opinion

Economists noted that the CBUAE’s move supports an easing strategy that balances growth promotion with inflation control. It reflects confidence in the UAE’s economic resilience and its alignment with global monetary trends.

Financial analysts predict that mortgage holders will likely see slightly lower monthly payments, while personal loan and credit card rates could also decline. On the other hand, returns on traditional fixed deposits and government bonds are expected to fall.

Overall, the economic impact may remain moderate unless the Federal Reserve initiates a more substantial easing cycle.

Vijay Valecha, Chief Investment Officer at Century Financial, told Khaleej Times that markets had anticipated a rate reduction both now and at the Fed’s December meeting. “According to the CME FedWatch Tool, investors are pricing in a 99.5 per cent likelihood of a 25-basis-point cut at the end of the Federal Reserve’s meeting,” he said.

Financial experts forecast that the Fed could implement another rate cut in December, with projections suggesting the federal funds rate may fall closer to 3 per cent by 2026. However, the coming months will determine how quickly the economy adapts to these changes amid political pressure and potential leadership shifts at the Fed.