The UAE central bank has decided to increase its benchmark interest rates by 25bps to 1.50% following the decision by the US Federal Reserve to raise interest rates by 25bps to 0.75%. The announcement came within hours of the decision by the US Federal Reserve and follows similar measures taken by central banks in Saudi Arabia, Kuwait, Bahrain, and Qatar.
The increase announced by the UAE central bank was applied to its certificates of deposits, which are the key monetary policy tool enabling the bank to transfer its rate changes to the country’s banking system.
The move by the Fed will likely further strengthen the US dollar, and since the UAE dirham, along with the currencies of other Gulf states, is pegged to the US dollar, it will also become stronger. This will make some of the UAE’s key sectors like tourism, retail, and real estate, more expensive to foreign customers and investors. This in turn could have detrimental effects on the UAE’s economy. Simon Williams, chief economist for Central and Eastern Europe, the Middle East and North Africa at HSBC, said that “a stronger currency makes it harder to attract capital, makes the region's non-oil exports less competitive and makes it harder for domestically produced goods to compete at home with ever cheaper imports”.
According to RFi Group data, in H1 2016 42% of UAE consumers were concerned about the impact changes in interest rates would have on them, while 52% were concerned about the UAE economic outlook. It will be interesting to see what impact these latest changes have on consumer expectations when the H2 2016 data is released in the coming weeks.