UAE: The Central Bank of the UAE raises base rates

The Central Bank of the UAE has followed the lead of its American counterpart and increased its lending base rate by 25 basis points to 1.25%. Although the central bank affects change by changing the rate applicable on certificates of deposits, a form of short-term interest, the hike is expected to affect medium and long term borrowing as well, with banks likely to pass on the increase to consumers and the interest rates on loans, credit card balances and mortgages all set to rise.

The increased interest rate will also affect the UAE currency, with a higher interest rate usually linked with a stronger currency. However, a stronger dirham is likely to negatively impact exporters and tourism.

While consumers who have loans are likely to see the impact of the hike immediately, those with current and saving accounts may have to wait awhile to see any benefits.

While consumers who have loans are likely to see the impact of the hike immediately, those with current and saving accounts may have to wait awhile to see any benefits. Jaap Meijer, Head of Research at the Dubai-based investment bank Arqaam, demonstrated this sentiment by saying, "If you are a saver it won’t make much of a difference immediately. Over time, there will be more rate hikes and the saving rates will go up. It will be in the next two years. Mortgages will feel more of the pain but savers will get more in gain."

In the short term, the increase in interest rates is unlikely to help the large proportion of the country who are concerned about their financial situation, with RFi Group data from late 2016 showing that 38% of UAE consumers are concerned (4 or 5 out of 5) with their current financial situation. Whether this sentiment improves could depend on how quickly banks and financial institutions are able to pass on the rate increase for both their saving and borrowing products.

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