UAE cost of living: Will rate hikes throw your finances off track?

Dubai: Residents across the UAE have spent much of this year watching their monthly budgets stretch thinner, much like the rest of the world. People were just about coming to terms with the repercussions of the geopolitical conflict in the region, but will now have to brace themselves to make adjustments again as borrowing costs are likely to rise.

Why the interest rate hike?

The UAE Central Bank has raised its base rate by 25 basis points to 3.9%, following a similar increase by the US Federal Reserve on Wednesday. The CBUAE Base Rate is anchored to the Federal Reserve’s Interest Rate on Reserve Balances and signals the general stance of monetary policy in the UAE. 

Because the dirham is pegged to the dollar, the UAE has little choice but to move in tandem with Washington. This time, the Fed's move came explicitly in response to geopolitical developments. We have seen how rising shipping and energy costs have already pushed up the cost of credit as well as brought about changes to our daily lifestyle.

What changes for you?

For residents, the effects will filter through gradually rather than hit all at once. Anyone with a variable-rate mortgage or personal loan tied to the Emirates Interbank Offered Rate (Eibor) can expect payments to climb when their rate is next reviewed.

Dinesh Krishnamurthy, a resident of Dubai, is dreading this review. He managed to buy his own home 2 years ago. His two-bedroom apartment in Business Bay was financed with a 3-year fixed interest rate. While nothing changes for him yet, since was a fix rate, he know he will have to negotiate hard in case the bank chooses to act on the recent rate hikes. "I keep refreshing my banking app the same way I check match scores, I hope this rate hike doesn't change my planned EMIs".

Will your rent increase?

Another affected party could be landlords with financed properties who might want to adjust for higher repayment costs.

Jaafar Hachem, Managing Director of Zentara Solutions, a Dubai-based company offering digital branding solution, says that the impact may not be immediate. "Higher financing costs could put some pressure on landlords with leveraged properties, but I don’t think this automatically translates into higher rents”.

Sunaira Sohail, a PR professional, said that she was worried about landlords taking these steps as that would throw a spanner in her monthly budget. “Housing being one of the biggest monthly expenses in Dubai, even a relatively small increase can have an impact on how you budget for the rest of the month”, she said.

Credit line crunch

Business owners who rely on credit lines to manage cash flow will also feel the pinch, and that cost typically gets passed on to consumers through higher prices on goods and services. “SMEs are already operating in an environment where costs need to be managed very carefully. Higher financing costs could add further pressure, particularly for businesses with existing debt”, Hachem, chimed in. However, he is of the view that businesses will look for ways to protect margins through better cost management.

Rising cost of living

But cost management for businesses are very different from budget-cuts at home. Cybil D'Costa, a homemaker and mother of two, says she has witnessed a 2x increase in her grocery bills over the past 3 months. For a family of 4, their monthly spends have shot up from Dh2000 to Dh3500, with basic fruits and vegetable prices seeing a considerable increase.

"I used to have a weekend order-in policy where I didn't cook and rather spent time with my boys. Now I've had to cut that down to just 1 day as I have to be more mindful and selective about our discretionary spends", she added.

For now, the immediate effect of the rate hike is contained mostly to those with variable-rate loans and mortgages. But economists caution that the real impact tends to arrive with a lag. The coming months will likely test how much further household budgets can absorb before spending habits visibly shift, whether that means residents cutting back on dining out, delaying big-ticket purchases, or renegotiating fixed costs like rent and school fees.