US Federal Reserve raises interest rate by another 0.25% - UAE, Kuwait, Bahrain central banks raise too

Dubai: Businesses and consumers in the UAE will have to factor in an interest rate hike for the 11th time since March 2022, with the US Federal Reserve confirming a widely expected 0.25 per cent increase at its meeting today (July 26).

What that means for most residents and businesses is an increase coming into effect the next time they make a payment towards their loans and any other outstanding they have. (The UAE dirham’s peg to the dollar means it mirrors interest rate movements as well.)

The US federal funds rate is now at 5.25-5.5 per cent, making it the highest in 22 years.

But Gary Dugan, CIO of Dubai-headquartered Dalma Capital, is not so sure about whether the Fed is done with the hikes.

“A re-acceleration of the US economy could easily set off a re-emergence of inflation pressures. Indeed, ever since the better-than-expected US inflation data of last month, oil prices have sharply increased and wheat prices are higher as a consequence of the trouble in Ukraine.”

The Fed had put off a rate hike last month, after mounting concerns that it could trip the US economy into a deep recession. Plus, it was still dealing with the series of crises that had overtaken the US banking sector.

How are UAE consumers adjusting?

There has been no slowing down on demand for loans and other credit, whether that’s among UAE businesses or individuals. The first-half results of the major banks are out, and each of them have pulled out solid income gains. (No doubt, the rate hikes are helping.) But the banks have made strides in extending loans, with the sentiment among clients being that they can take the higher cost of debt in their stride.

Today, the UAE Central Bank issued its latest credit sentiment survey, which echoes the upbeat mood.

“Although changes in interest rates have had some degree of a negative impact on credit demand at their institutions, the positive effects of improved housing and financial market outlook, change in incomes, and seasonal influences have more than offset it.”

For UAE, it’s all in the jobs

Bal Krishen, the Chairman and CEO of Dubai-based Century Financial, is in full agreement about the job market and income generation side of things.

“The UAE is more open to immigrants and migrant labour than the rest of the world, which has helped it attract the best of global talent,” said Krishen. “UAE consumers stepping up their pace of card borrowing could be seen as a vote of confidence in growing economic prospects as the job market remains robust and wages are rising.

“It is expected that the activity in the wholesale and retail sector will pick up, helped by a growing population and the sustained influx of tourists, especially those with elevated purchasing power. This should support corporate borrowing also.”