UAE Central Bank raises base rate to 3.90% after Fed's rate hike

The UAE Central Bank raised its base rate by 25 basis points to 3.90 percent on Wednesday, according to a report by Khaleej Times.

The move followed the US Federal Reserve's quarter-point rate increase, as the UAE tracks Washington's monetary policy through the dirham's dollar peg.

Why does the UAE Central Bank raise its base rate with the Fed?

The UAE Central Bank raises its base rate because the dirham is pegged to the US dollar. That peg requires the UAE to track Federal Reserve policy closely to keep the currency stable. When the Fed raises rates, the UAE Central Bank base rate typically follows within a day or two.

The Base Rate had stood at 3.65 percent before the hike.

What do analysts say about the rate increase?

Vijay Valecha, chief investment officer at Century Financial, said the Fed's move was widely expected after a pause of more than three years. He said the UAE Central Bank typically follows the Fed because of the dollar peg. He added that the Base Rate shapes overnight money market rates and EIBOR, the benchmark for most local lending.

How will the rate hike affect mortgages and business loans?

Valecha said the increase will likely raise costs for variable rate mortgages and corporate loans. He said lending rates across the system tend to rise when the Base Rate goes up. Businesses already facing higher energy and shipping costs could see added pressure.

Madhur Kakkar, founder and CEO of Elevate Financial Services, had predicted the increase before the Fed's decision. He said a 25 basis point rise would take the UAE rate from 3.65 percent to 3.90 percent, in line with the dollar peg.

Will savers or borrowers feel the impact first?

Kakkar said the effects on consumers will unfold gradually. Savers and term deposit holders are likely to see better returns before borrowers feel higher repayment costs. He estimated a full 25 basis point rise on an outstanding AED 1.5 million mortgage with 25 years remaining would add about AED 210 a month, or roughly AED 2,500 a year.

What happens next with UAE interest rates?

Analysts said markets will now watch the Fed's next policy steps closely. They are also watching whether officials keep rates higher for longer into 2027. Any further Fed moves are likely to be mirrored by the UAE Central Bank base rate, given the dirham's peg to the dollar.