UAE loan rates to rise? Escalating Iran-US conflict clouds next interest rate cut

Dubai: A sharp spike in oil prices following escalating hostilities involving Iran is complicating the outlook for interest rates, raising fresh questions for households and investors from the UAE to the US.

Brent crude spiked more than 9% in a single session. The surge followed US and Israeli strikes on Iran and Tehran’s retaliation, alongside reported threats to shipping through the Strait of Hormuz, a passage that carries roughly 20% of the world’s crude supply.

The move has rattled global stock markets and reignited debate over whether central banks can proceed with anticipated rate cuts this year — a prospect closely watched by UAE homeowners and businesses facing elevated borrowing costs.

Nigel Green, chief executive of Dubai-based deVere Group, said the scale and speed of the oil rally risk altering inflation expectations and delaying monetary easing.

“When oil surges with this magnitude and velocity, inflation gathers force rapidly,” Green said. He warned that a sustained move toward $90 Brent would “fundamentally alter the inflation outlook and force a repricing of interest rate expectations.”

“Markets had been positioning for lower borrowing costs, but this narrative is now under threat,” he added, saying investors should prepare for rates “staying elevated well into 2026, and potentially moving higher if inflation proves stubborn.”

Economists in the US say the Federal Reserve is unlikely to react immediately. The Federal Open Market Committee meets March 17–18, with forecasters expecting the benchmark rate to remain in the 3.5%–3.75% range.

Tom Porcelli, chief economist at Wells Fargo, described the current oil spike as a supply-driven shock — the type policymakers often “look through” when setting rates.

“Absent a prolonged war and major long-term disruptions to key shipping routes in the Strait of Hormuz, the impact on U.S. growth, inflation and monetary policy should remain modest,” Porcelli said in a March 2 commentary, adding the situation is fluid.

He cautioned that persistently higher energy costs could unanchor inflation expectations, narrowing the Fed’s room to ease.

For UAE residents, the Fed’s stance carries direct consequences. The dirham is pegged to the U.S. dollar, and the UAE Central Bank typically mirrors Federal Reserve rate decisions to maintain currency stability.

If U.S. rates stay higher for longer:

For many households, hopes of lower monthly repayments would be pushed further out.

Wayne Winegarden, senior fellow in economics at the US-based think tank Pacific Research Institute, said the duration of the conflict would determine the economic fallout.

“If the war is short, consumers may see higher prices at the gas pump for a few weeks,” he said. “If it drags on or escalates, energy costs could surge and raise the risk of stagflation.”

In the United States, higher gasoline prices could filter into food, transport and airline costs. In the UAE, where fuel prices are adjusted monthly in line with global benchmarks, residents could also see changes reflected relatively quickly at the pump.

Beyond fuel, higher oil prices raise shipping and logistics costs. Air cargo networks have already faced constraints, with FedEx suspending flights to and from several Middle Eastern destinations over safety concerns. That includes imported food and consumer goods in the UAE, where much of what is sold is brought in from abroad.

Europe and parts of Asia, which rely heavily on imported energy, may face renewed inflation pressures if oil remains near current levels. Diverging policy responses could add to currency volatility.

Green said bond markets were already adjusting to reduced confidence in near-term rate cuts and warned that duration risk was rising in fixed income portfolios.

“This is not a typical volatility episode driven by sentiment alone,” he said. “This is a supply-side shock with tangible macroeconomic consequences. Monetary policy flexibility will narrow as inflation pressure builds.”

For now, most economists expect central banks to hold rates steady and assess incoming data.

But if oil prices remain elevated for months rather than weeks, expectations for rate cuts could be pushed further out — leaving borrowers in the UAE and globally facing the prospect of higher-for-longer interest rates just as energy bills rise.