Dubai: As opposed to when rising interest rates across the world made borrowing steadily more expensive up until now, UAE residents were hoping for loans to get much more affordable with multiple interest rate cuts slated this year. But the wait is only going to get longer.
After the world’s largest economy, the United States, on Wednesday paused its streak of 10 rate hikes for the fifth straight month, with central banks like the UAE also following suit worldwide, top officials flagged how there would be three interest rate cuts this year instead of the previously predicted four.
The latest move from central banks revealed how policymakers are more inclined to keep rates higher for longer to make sure inflation does not flare up again. But how would this affect you and your plans to take on loans this year? You may have to postpone by a few more months.
How higher interest rates affected borrowing demand
“Rising interest rates have clearly affected spending on a global level because the cost of borrowing money went up,” said Brody Dunn, an investment manager at a UAE-based asset advisory. “So, if you have any type of credit card or loan, you ended up paying more for the money you borrowed.
“This is why potential borrowers become more hesitant to borrow money because of the higher cost. However, as interest rates are expected to fall this year, it should eventually get easier to borrow money – provided that enough rate cuts are implemented.”
In other words, the more the number of rate cuts, the more borrowing costs will drop. With lesser interest rate cuts planned for this year, the trickledown effect leading to cheaper loans diminishes, meaning loans will stay costly for longer.
How soaring inflation resulted in multiple rate hikes
For economies worldwide, there has been a prevalent threat of inflation re-accelerating and requiring even more of such drastic rate hikes in the future, if central banks don’t keep reining in a surge in prices by making it more expensive for businesses and people to borrow money.
“Making debt more expensive is an intended consequence of tightening monetary policy to contain inflation,” explained Abbud Sharif, a banking industry analyst based in Dubai. “The good news now is inflation has slowed - suggesting the world economy is playing out the way central banks had hoped.
“The risk, however, is borrowers might be in precarious positions financially. Higher interest rates could amplify these fragilities, leading to a surge of defaults, and with the cost of repayments rising for you, lenders want to ensure that they are lending to those who can handle higher rates.”
Making debt more expensive is an intended consequence of tightening monetary policy to contain inflation
Borrowing rates still high, wait till 2025 to benefit
Higher interest rates mean it’s more expensive to borrow money, which slows or delays big purchases, lower rates encourage borrowing and tend to increase money supply in the market. For example, the lower the interest rate the lower the mortgage payments on a newly purchased house.
“As interest rates are peaking now and start to drop later this year, if you’ve been considering a large financial decision now, such as buying a house or purchasing a car, consider postponing plans until you get favourable loan terms towards the end of 2024 or start of 2025,” Sharif added.
“Also, credit cards with variable rates tend to drop when the rates start to slow. So, if you’re trying to catch up on credit card debt, this can be of some help. If you already have a loan, lower interest rates might mean it is a good time to evaluate your current terms and consider refinancing it.”
How to benefit from an interest rate hike drop in June?
“Only a few investments stand to benefit when interest rates start to go down, compared to when they are paused or continue at existing levels,” added Dunn. “For instance, your bond investments give good returns in a high-rate environment.
“When it comes your investments in stocks, high interest rates tend to make stocks more attractive to investors, as they can generate higher returns than fixed-income investments. This can lead to a rise in stock prices, which can result in higher returns for those who have invested in stocks.”
Dunn reiterated that lower rates also incentivise borrowing, so as businesses make more investments in their business, their stock prices tend to rise again. “So depending on where you invest, lower or higher interest rates could affect you positively or negatively,” he added.
When it comes your investments in stocks, high interest rates tend to make stocks more attractive to investors, as they can generate higher returns than fixed-income investments
Bottom line
While increasing rates made borrowing more costly and reigns in spending in favor of saving, looming lower interest rates will make borrowing cheaper - allowing people to borrow more freely. As rate hikes are expected drop as soon as June, borrowing and spending will rise in tandem.
“While borrowing may provide better terms when interest rates are low, it’s still wise to be cautious. In contrast, some areas that could offer lower rates of return when interest rates go down include savings accounts, deposits, bonds, and money market accounts,” added Sharif.
“While your savings account will be earning less interest when interest rates are low, it’s still important to keep saving. Especially if you haven’t built up an emergency fund, you’ll want to save in the case of an unexpected major event.”
However, realistically, financial planners often reiterate that for most people, if you have an established savings plan and financial goals, a lower interest rate will most likely not be a significant reason to materially change your savings strategy.
