UAE central bank mirrors Fed decision to keep interest rates steady

The UAE Central Bank has kept its benchmark interest rate unchanged, mirroring the US Federal Reserve’s decision to maintain its policy rate, as economic uncertainty looms due to Washington’s ongoing trade tensions.

On Wednesday, the Federal Open Market Committee (FOMC) held borrowing rates steady at 4.25% to 4.50%, marking the second time since US President Donald Trump began his latest term in office. The Fed, which cut rates by 100 basis points last year, is in no rush to ease monetary policy further as it grapples with persistent inflation and the administration’s expansionary fiscal measures.

Fed cautious on inflation and growth

"Uncertainty around the economic outlook has increased," the Fed noted in a statement, reaffirming its commitment to maximum employment and 2% inflation over the long run.

Fed Chair Jerome Powell, in a media briefing, stressed the need for “real progress” on inflation before further rate cuts. "We are not in a hurry to adjust our policy stance," he stated, adding that the impact of tariffs on inflation remains difficult to quantify.

Despite maintaining rates, Fed officials now expect inflation to rise to 2.7% in 2024, up from their previous 2.5% forecast. Core inflation is projected to hit 2.8%, also above earlier estimates. Meanwhile, the US economy’s growth outlook has been revised down to 1.7% for this year, from 2.1%, with unemployment expected to rise to 4.4%.

Markets react as Fed signals policy flexibility

Despite concerns over inflation, Powell downplayed its long-term impact, suggesting that the Fed remains open to policy adjustments to support growth.

Markets responded positively, with the S&P 500 gaining over 1%, the Nasdaq 100 up 1.3%, and Dow Jones climbing 0.93%. Bond yields also dipped, with the two-year Treasury yield slipping below 4% and the 10-year yield easing under 4.25%.

UAE Central Bank aligns with Fed policy

As most Gulf central banks peg their currencies to the US dollar, the UAE follows Fed policy rate movements, except for Kuwait, whose dinar is linked to a currency basket.

The UAE Central Bank announced it would keep its base rate for overnight deposits at 4.40%, maintaining short-term borrowing rates 50 basis points above this level.

This base rate, tied to the Fed’s interest on reserve balances (IORB), serves as a monetary policy signal and overnight interest rate floor in the UAE’s financial markets.

UAE economy maintains strong momentum

Despite global economic uncertainties, the UAE’s economy continues to expand, driven by strong growth in the non-oil sector. During the first nine months of 2023, the country recorded a GDP growth of 3.8%, reaching Dh1.32 trillion ($359.4 billion).

The non-oil sector played a significant role in this expansion, growing at an annual rate of 4.5% and accounting for 75% of the UAE’s total economic activity. Meanwhile, the oil sector contributed the remaining 25%, according to state news agency WAM.

Looking ahead, the UAE Central Bank projects continued economic growth, forecasting a 4% increase in GDP for 2024, with acceleration to 4.5% in 2025.

The non-oil sector is expected to maintain its strong trajectory, with growth projected to reach 5% in 2025. Inflation forecasts have also been adjusted downward, with expectations of 1.8% in 2024 and a further rise to 2% in 2025, primarily influenced by non-tradable goods and moderating energy prices, the CBUAE said in its fourth quarter 2024 review.