Impact of US Federal Reserve rate hike: Why loan, credit card interest rates likely to increase in UAE
Still paying back your loan? Your repayments could get costlier next year
Dubai: Many consumers in the UAE won’t be left unscathed by the latest round of rate adjustments approved by the UAE Central Bank.
According to analysts, borrowers in the country, including those who have credit card debts, mortgages, personal loans and car loans, can expect to pay higher interest rates.
Among those who are likely to spend more on loan repayments are those who have borrowed money on a variable interest rate basis.
The US Federal Reserve last week increased its benchmark interest rate to 2.25 per cent to 2.5 per cent, the fourth adjustment this year. The decision prompted the UAE Central Bank to also increase the interest rates applied to certificate of deposits effective Thursday, December 20.
“The rate hike would translate into higher costs for personal, vehicle and mortgage loans,” Raghu Mandagolathur, senior vice president for research at Kuwait Financial Centre, told Gulf News.
“The rate at which banks charge for consumer loans, including that of credit card, is usually pegged to a repo rate.
Increase in repo rates would be passed on to the customers in the form of higher annual percentage rate (APR) for variable rate credit cards,” he added.
A number of UAE residents are still in the middle of repaying borrowed funds from banks. As of the latest estimates, the average person in the country owes a little over Dh40,000 in credit card balances, car loans and other forms of personal borrowings.
UAE residents’ total personal loans reached more than Dh434 billion in the third quarter of 2016, up from Dh430 billion in the previous quarter.
Why US move impacts UAE
With the UAE dirham pegged to the US dollar, any adjustments to the benchmark interest rates in the United States could be passed on to consumers in the emirates.
“The US decision will be having its implications on the UAE monetary policy since the dirham is pegged to the US dollar. Not surprisingly, the UAE Central Bank has raised the interest rate on certificates of deposits as they are the primary monetary transmission tool and the added cost is likely to be passed on by UAE banks to retail borrowers country,” explained Vijay Valecha of Century Financial.
Unlike ordinary consumers, businesses with loans, however, might be able to negotiate for a favourable interest rate. The good news is that there could be lesser chances of having the borrowing rates increased again next year.
“Corporate customers might be able to get some leeway as their leverage on the negotiation table is much higher. Nevertheless, the silver lining amidst all this news is that next year there is expected to be only one rate hike according to CME FedWatch tool. Looks like 2019 will be a good year for borrowers,” added Valecha.