UAE Central Bank maintains rates, following US move

20/03/2025 03:10 AST

The UAE Central Bank on Wednesday decided to maintain the base rate applicable to the overnight deposit facility (ODF) at 4.40 per cent.

The UAE's decision follows that of the US Federal Reserve, which decided to hold its interest rates. The UAE follows US monetary policy as the UAE dirham is pegged to the US dollar.

The CBUAE has also decided to maintain the interest rate applicable to borrowing short-term liquidity from the CBUAE at 50 basis points above the Base Rate for all standing credit facilities.

The US Federal Reserve held its interest rates on Wednesday, as the US central bank continued to pause in order to better take stock of the impact of US President Donald Trump's tariff wars on major trade partners.

In a statement, the Federal Open Markets Committee (FOMC) said that it had decided to maintain the target range for the federal funds rate at 4.25 to 4.5 per cent. This was the third month in a row that the rates have remained the same.

The Committee said it will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities. Beginning in April, the FOMC will slow the pace of decline of its securities holdings by reducing the monthly redemption cap on Treasury securities from $25 billion to $5 billion.

Last year, the FOMC implemented three consecutive rate cuts, bringing the federal funds rate to the 4.25 per cent-4.50 per cent range as it responded to the broader slowdown in US labor markets. Currently, the CME FedWatch tool indicates a rate cut probability of 16.7 per cent for the May meeting, while a 53.2 per cent probability remains for the June meeting, reflecting the prevailing uncertainties surrounding economic conditions in the US. About two rate cuts are expected for the whole year, bringing the terminal rate close to 3.75 per cent. Looking forward, Fed officials confront a challenging landscape, with the latest CPI figures coming at 2.8 per cent, way above the 2 per cent target, while an economic slowdown remains probable.

A model by Goldman Sachs recently increased its probability of a recession over the next year from 15 per cent to 20 per cent, mostly due to the economic uncertainties caused by Trump's aggressive tariff policies. If an economic downturn occurs, it may prompt the Fed to decrease interest rates to stimulate the economy. However, the risk of tariffs driving inflation upwards remains, potentially requiring the Fed to maintain higher interest rates.

With the UAE maintaining rates, the interest rates on loans and mortgages will now stay higher for longer. "Consequently, stocks in the banking and financial sector, comprising about 40 per cent of the UAE stock market, are expected to perform well. Further, these sectors are tariff-resistant and would somewhat protect the UAE markets from broader tariff-related volatility," Vijay Valecha, Chief Investment Officer, Century Financial, told Khaleej Times.

Khaleej Times