UAE residents face ‘higher for longer’ borrowing costs with US to delay rate cuts

Dubai: Interest rates in the UAE are likely to remain elevated for longer as the US Federal Reserve is widely expected to hold borrowing costs steady, delaying potential rate cuts amid rising geopolitical tensions and persistent inflation risks.

For residents across the UAE, the Fed’s policy decisions carry direct consequences. Because the UAE dirham is pegged to the US dollar, the Central Bank of the UAE typically mirrors US interest rate moves, meaning local borrowing costs tend to follow the Fed’s direction.

Economists and market analysts now expect the US central bank to keep rates unchanged at its upcoming meeting, with the first possible rate cut pushed further into the year.

Delayed rate cuts

Investors had earlier anticipated that the Fed would begin lowering interest rates in the spring. However, rising oil prices linked to the Iran conflict and lingering inflation pressures have altered expectations.

Nigel Green, chief executive of deVere Group, said the earliest realistic opportunity for a rate cut now appears to be mid-year. “The window for the first rate cut has materially shifted,” he said.

“Markets had been looking for earlier action, but inflation dynamics and the spike in oil prices mean policymakers will almost certainly hold next week and remain cautious in the months ahead.”

Green said July now appears to be the earliest credible timeframe for the first reduction in borrowing costs. “Energy prices are feeding directly into inflation expectations again. With oil surging on Middle East tensions and the economy still showing resilience, there’s little urgency to cut immediately,” he said.

The reassessment marks a notable shift from expectations earlier this year, when markets were pricing in several rate reductions beginning in the first half of 2026.

What to expect

For UAE residents, the delay in rate cuts means borrowing costs are likely to remain elevated for several more months.

Mortgage holders with variable-rate home loans may continue to face higher monthly repayments, while new borrowers could encounter higher financing costs for property purchases, personal loans and car financing.

Credit card interest rates are also influenced by the benchmark rate environment, meaning the cost of revolving debt may remain relatively high. Banks across the UAE typically adjust lending rates in line with changes in the Emirates Interbank Offered Rate (EIBOR), which closely tracks US interest rate movements.

As long as US policy rates remain unchanged, local benchmark lending rates are likely to remain broadly stable at current levels.

Oil price problem

One factor influencing the Fed’s decision-making is the surge in energy prices triggered by tensions in the Middle East. Oil prices climbed sharply as the conflict involving Iran intensified, briefly pushing crude prices toward $120 per barrel earlier this week before easing slightly.

While higher oil prices can support economic activity in energy-producing regions such as the Gulf, they also increase inflation pressures globally.

Nigel Green said the return of energy-driven inflation risks makes it harder for policymakers to move quickly toward rate cuts.

“Officials will want confidence that inflation is on a sustainable downward path. The recent move in oil makes that harder to establish in the near term,” he said.

US economic uncertainty

The oil price surge is also adding uncertainty to the broader economic outlook. War in the Middle East has increased the risk of higher inflation while potentially weighing on global growth and business confidence.

“This is certainly a bind for the Fed, because supply shocks are extremely hard to deal with in that they lift inflation and they curb output,” said Gregory Daco, chief economist at EY-Parthenon.

Economists say this combination puts policymakers in a difficult position. Raising interest rates could further slow economic activity and weaken the labour market, while cutting rates too quickly could risk reigniting inflation.

Diane Swonk, chief economist at KPMG, said the duration of the Iran conflict will be an important factor in determining the Fed’s next move.

“I think the main story here is that we are seeing inflation moving away from the Fed’s two-percent target,” she said.

Rates ‘higher for longer’

For financial markets and consumers alike, the result is likely to be a continuation of the “higher for longer” interest rate environment that has defined global monetary policy over the past year.

Green said investors and borrowers should prepare for a slower pace of rate cuts than previously expected.

“Expectations are evolving quickly. July now looks like the earliest realistic point for the first cut, and even then, the easing cycle is likely to be gradual,” he said.

Markets will now watch incoming inflation data, labour market figures and developments in energy markets closely in the coming months.

Oil prices remain a particularly important variable. Sustained increases could feed through into transport, manufacturing and consumer prices, complicating the path toward lower inflation.

“Inflation progress has slowed and energy prices have jumped,” Green said. “Those factors together mean policymakers at the Fed will be in no rush to cut rates any time soon.”

– With inputs from Agencies