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Dubai: Although interest rates stopped rising across the world, borrowing has been expensive up until now. If you were hoping to borrow at more affordable rates, especially with multiple interest rate cuts slated this year, you may have to wait longer, the latest market update revealed.

After the world’s largest economy US, last week, paused its streak of 10 interest rate hikes for the sixth straight month, with central banks like the UAE also following suit, top economists revised their prior stance on how there now wouldn’t be a rate cut until later, i.e. November, this year.


With the latest move from central banks indicating how policymakers are more inclined to keep rates higher for longer, how would this affect your savings? Does this mean you would be able to save more if borrowing rates gets cheaper?

How a rate-hike pause affects savings accounts

“Your short-term liquidity depends on money in the bank. As interest rates rose, so have deposit account rates. The continuing pause in interest rate increases will likely keep deposit account rates near their current level,” explained Abbud Sharif, a banking industry analyst based in Dubai.

“But savvy savers need to shop for the best returns as providers consider easing their interest rate payouts. Short to mid-term money is best parked in a savings account. It's part of your easy-in, easy-out cash strategy.”

In other words, savings account rates are loosely linked to the interest rates set by central banks. After central banks raise their rate, banking institutions tend to pay more interest on savings accounts to stay competitive and attract deposits.

High rates keep hurting purchasing power? Not for long

“Rising interest rates have clearly affected spending on a global level because the cost of borrowing money went up,” explained Jose Paul, an Abu Dhabi-based banker. “So, if you have any type of credit card or loan, you ended up paying more for the money you borrowed.

“However, what’s often overlooked is the fact that this will also mean that you inevitably have less money to spend elsewhere. So, while higher interest rates make it more expensive for people to borrow money and encourage people to save, that means people will tend to spend less.”

If people spend less on goods and services overall, the prices of those things tend to rise more slowly, and this is meant to keep inflation in check. But is this what was happening currently? “Interest rate hikes and restricted spending both helped contribute to rein in inflation across most economies – but only to an extent,” added Paul.

How soaring inflation worldwide 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.

“The good news now is that global inflation has meaningfully slowed since the last rate hike in July and consumers are beginning to spend less – suggesting that the world economy is playing out the way central banks had hoped,” added Paul.

“Up until now, the higher rate of interest meant borrowers paying even more interest on credit cards, loans, and other types of variable-rate debt. With interest rate hikes peaking now, it will start to get cheaper for borrowers next year, as indicated by the rate hike decision yesterday.”

Wait until 2025 to save from lower borrowing rates

Higher interest rates mean it’s more expensive to borrow money, which slows or delays big purchases, lower rates encourage borrowing affordably and tendency to save more. For example, the lower the interest rate, the lower the monthly mortgage payments on a newly purchased house.

“As interest rates peak now and definitely drop next 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,” 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 paused rate hikes or a rate hike drop?

“Your investments stand to benefit when interest rates start to go down, but not when they are paused or continue at existing levels,” added Paul. “But 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.”

Paul 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 your asset allocation, lower or higher interest rates could affect you positively or negatively,” he said.

make use of the higher interest seen now and save more, as the rates you see now will be no longer seen by the start of next year. As borrowing rates drop next year, the savings you accumulate can be used to borrow affordably

- Jose Paul

Bottom line?

"A key financial advise you can takeaway in terms of your wallet or finances is to make use of the higher interest seen now and save more, as the rates you see now will be no longer at your disposal by the start of next year. As borrowing rates drop by next year, the savings you accumulate can be used to borrow affordably," Paul added.

While increasing rates makes borrowing more costly and can rein in spending in favour of saving, lower interest rates make borrowing cheaper - allowing people to spend and invest and save more freely. Also, as rate hikes have now halted, and start dropping by 2025, borrowing, and saving rates will stay high.

“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, UAE-based 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 saving strategy.