UAE Inflation Forecast Revised Upwards as Commodity Prices, Rents Rise

The Central Bank of the UAE (CBUAE) has revised its inflation forecast for 2024 to 2.3%, up from 1.6% in 2023, primarily due to moderate rises in "commodity prices, wages, and rents", the central bank said on Friday.

Inflation for 2025 is also expected to average 2.3%, driven primarily by the non-tradeable component of the basket, rising domestic demand, and potential depreciation of the dirham's nominal effective exchange rate, the CBUAE said in its Quarterly Economic Review.

The CBUAE said in the report that it has its key policy rate unchanged since July 2023 at 5.4%, with the Dirham Overnight Interest Average rate averaging around 22 basis points below the Base Rate, reflecting sustained excess reserves.

Strong deposit growth of 15.2% year-on-year in Q1 2024 supported favorable funding and liquidity conditions. The banking sector's loan portfolio expanded by 8% year-on-year in the first quarter, demonstrating ample credit capacity. The UAE banking system remained resilient with adequate capital and liquidity buffers, according to the central bank.

In the first quarter of 2024, share prices in Dubai rose by 25.4% year-on-year, while in Abu Dhabi they fell by 3.6%. This resulted from the fall in the shares of some major companies that constitute 25% of the total freely tradable shares. CDS premiums for Abu Dhabi and Dubai further declined on the back of strong fundamentals, the central bank said.

In addition, the insurance sector saw an 18.5% year-on-year increase in gross written premiums and an 18.3% increase in gross paid claims in Q1 2024. Technical provisions rose by 6.9% year-on-year, with the sector remaining well-capitalized, recording healthy capital adequacy and earnings ratios at the end of the quarter.

According to the bank's Quarterly Economic Review, the real estate sector across the country remained vibrant. In Abu Dhabi, the number of residential real estate sales transactions continues to rise, leading to a year-on-year increase in median residential property sales prices by 3.3% in Abu Dhabi and 13.9% in Dubai between January and April.

The transportation and tourism sectors also showed strong performance. According to the central bank, tourist arrivals grew by 11% in the first quarter of 2024, while passenger traffic at Abu Dhabi and Dubai International Airports increased by 36.0% and 8.4% year-on-year, respectively.