20221102 fed rate hikes
How much of a dent will the latest US rate hike make on your loan payments and other obligations? Image Credit: AP

Dubai: The US has hiked its interest rate by a fourth successive 0.75 per cent, and which should spell immediate changes for consumers in the UAE and the Gulf as central banks raise their prevailing base rates. As has been the case with previous hikes, the next big question is whether the Federal Reserve will follow up with another one in December – and whether it would be by 0.75 per cent or lower.

The US federal funds rate will thus be 3.75-4 per cent with the latest increase. (The previous Fed hike was on September 21, and so far this year, it has been raised by 375 basis points.) US monetary policymakers did signal the possibility that future rate increases need not be running as high as 0.75 per cent.

The UAE Central Bank has, as with earlier Fed rates, matched the move, with the Base Rate on the Overnight Deposit Facility going up to 3.90 per cent from 3.15 per cent from Thursday. The UAE regulator also decided to maintain the rate applicable to borrowing short-term liquidity from it through all standing credit facilities at 50 basis points above the Base Rate.

Bahrain has signalled it's matching the US rate hike, which would mean 4.75 per cent being the prevailing rate. Qatar's central bank too confirmed the move within the first 15 minutes of the US decision.

Saudi Arabia became the latest to confirm its 0.75 per cent hike.

That time (for lower US rate hikes) is coming and it may come as soon as the December meeting

- Jerome Powell, US Federal Reserve Chairman

UAE businesses learn to adapt

In the UAE, businesses are learning to factor in the higher cost of debt in their books, according to banking and financial services industry sources.

“So far, businesses in the UAE have been able to meet their working capital requirements,” said Bal Kishen Rathore, CEO of Century Financial. “Fortunately, according to IMF, the Middle East is expected to see better growth of 5 per cent in 2022 compared to 4.1 per cent in 2021. So, companies here are fundamentally much better placed.

“Case in point, UAE’s stock market listed companies for which information is available have shown a sales growth of 22 per cent in the second quarter of 2022 compared to last year. Yet, the slowing global growth is likely to have some impact in the region.

“Export-focussed businesses could face some slowdown as the hawkish stance of global central banks begin to affect demand in advanced economies.” (The current average annual cost on working capital related financing in the UAE is around 10.50 per cent, according to Rathore.)

US stocks, gold gain - and then drop
US stocks and the gold price rose in the immediate aftermath of the rate hike decision by the Federal Reserve. Bullion is at $1,663 an ounce levels. But much of those gains were trimmed and gold is at $1,648 at 11 GST.

The US stocks, meanwhile, have inched up slightly after being in the red ahead of the announcement. But an hour after the announcement, the main indices were trading in negative.

UAE's expats need to keep track of what will likely happen to their domestic currencies, with the dollar all set to rise. Again.

UAE property market needs its mortgage buyers

According to feedback, UAE banks had seen mortgage lending growth in the third quarter, but some sources say the pickup rates might have slowed down in October. “There could have been a bit of front-loading by mortgage takers in July-September, which is what’s reflected in the banks’ Q3-22 advances,” said a top official at a local bank. “Every end-user mortgage taker knew what the Fed was going to do, and if they could, they took out the mortgage in July/August itself.

“And locked in their rates for the first- to third year. Personally, even if mortgages remain muted in Q4-22, my book would still be 20-25 per cent higher than last year.”

Banking and property sources confirmed that a lot of mortgage-backed deals did happen through summer, once potential buyers realised what the series of rate hikes would mean for their EMIs.

20221102 fed rate
US stock markets have reacted positively to the latest Fed decision, making slight gains after being in the red ahead of the actual announcement. Image Credit: AP

What will the new rates mean for new mortgage takers? "A few banks had until now still offered fixed pricing starting from 4.35 per cent for 1-year fixed," said Dhiren Gupta, who heads 4C Mortgage. "However, 2- and 3-year fixed pricing have gone up to 4.49-4.99 per cent levels.

"A few banks have also kept 5-year fixed pricing from 4.99-5.90 per cent. However, banks have been promoting variable rates starting 0.55 per cent linked to 3-month EIBOR."

Consumer spending in the UAE is still high and businesses are still doing well. The US Fed rate hike surely has increased the borrowing cost for us in the GCC, but that would not stop us from expansion. The UAE economy is robust and still gives us good prospects of expansion

- Rafih Filli, founder & CEO of the FiLLi Cafe chain