Global interest rates were down to near zero in early 2009 as central bankers led by the US Federal Reserve battled to push back economic collapse during the worst moments of the global banking crisis. Inflationary pressures are now starting to build worldwide ... and higher interest rates are the only weapon central bankers have to combat them.

Hence, the interest rates are going up again, thanks to a well-televised Fed move on March 21. Led by Jerome Powell in his first meeting as chairman, the US central bank approved the widely expected quarter-point hike putting the new benchmark funds rate — what banks charge one other for overnight loans — at a target of 1.5 per cent to 1.75 per cent.

It was the sixth rate hike since the regulatory body Federal Open Market Committee began raising rates from a near-zero in December 2015. This is still low by historical standards, but it scripts the central bank’s fourth rate increase in the past 12 months and symbolises confidence in an economy that’s picking up momentum nearly nine years after the Great Recession ended.

Fed officials raised their forecast for 2018 US GDP growth from 2.5 per cent in December to 2.7 per cent, and increased the 2019 expectations from 2.1 per cent to 2.4 per cent. Clearly, the Fed is taking a middle ground on rate hikes, boosting rates enough to curb an eventual spike in inflation without derailing the economic expansion.

It is likely to raise rates further to tighten monetary policy and the UAE Central Bank will have to follow suit because of the dirham’s peg to the dollar. The UAE interest rates on corporate loans are at a margin over 3-month Emirates Interbank offer rate (Eibor), which is at 2.20 per cent. This has risen from 1.40 per cent at the same time last year and is expected to rise to over 2.5 per cent in the next six months.

UAE interest rate

Given the dirham’s peg, interest rates in the local market tend to follow the same trend as the rate hikes in the US, though with slight variations.

As the interest rates in the UAE are expected to increase in the next two to three years, for loans with a shorter tenure — say, of less than three years — it is advisable that the residents opt for a fixed rate. However, in the long term, interest rates largely depend on the turnout of macroeconomic events — crude oil pricing, regional and global war and peace scenarios, the fiscal and monetary policy in the UAE, and future Fed decisions regarding interest rates.

Hence, it is advisable to opt for floating rate for long term mortgages, as individuals can benefit if interest rates go down. The interest rate on unsecured credit in the UAE was delinked from base rates quite some time back, with credit cards charging annual percentage rates (APRs) of around 40 per cent on average. The rates on non-salary transfer loans are also considerably high, starting at 14 per cent on average. And debt is a luxury that one can no longer afford.

More than ever one must maintain a flawless credit report, as creditors increasingly link interest rates to customer credit scores and the better the score, the lower the interest and vice versa. In future, this will be the only way to secure a below average rate.

The hike in Fed rates will have its impact across most GCC states as the resultant appreciation in bank finance rates is likely to increase the cost of living and doing business.

Improve productivity

The change in rates is expected to play a major role in the UAE banking sector as it would impact on credit disbursal and deposits. The net interest margins would be increased with the increase in borrowing rates.

However, this necessarily may not increase their profitability as the slowdown in credit volumes would result in a drop in their income from interest on loans. That being said, the UAE will need to improve its credit environment to promote corporates to increase borrowings and thus improve their productivity.

The UAE banks will also need to further adopt consolidation measures and take hands-on steps to make borrowing further attractive for corporates to achieve better cost-efficiency and profitability at a time of rising interest rates.

The writer is the CEO and Executive Director of NMC Health plc.