Will UAE, US interest rates rise or fall tomorrow? What analysts expect next

Dubai: Interest rates in the UAE and the United States are likely to remain unchanged this week, offering borrowers little immediate relief while allowing savers to continue earning relatively strong deposit returns.

The US Federal Reserve will announce its next policy decision on Wednesday, July 29. Most economists expect it to retain the federal funds rate at 3.5% to 3.75%, the range maintained at its June meeting.

A similar decision would probably see the Central Bank of the UAE keep its Base Rate at 3.65%. The CBUAE last held the rate at that level on June 17 following the Fed’s previous announcement.

Yet the outlook beyond July is divided. Financial markets see a risk that the Fed could raise rates as early as September if energy costs remain high and inflation proves difficult to control. Morgan Stanley forecasts no change throughout 2026 and two possible cuts in 2027.

For UAE residents, the debate matters because the dirham’s peg to the US dollar means the CBUAE generally moves its main policy rate in step with the Fed.

A July pause remains the leading expectation, although some analysts describe the decision as increasingly close.

Renewed US-Iran tensions and volatile oil prices have complicated the outlook. Higher energy costs can feed into transport, manufacturing and consumer prices, making central banks more cautious about borrowing costs.

US inflation has cooled but remains above the Fed’s 2% target. The consumer price index rose 3.5% in the year to June, down from 4.2% in May. Prices declined unexpectedly on a monthly basis, while energy costs remained 15.7% higher than a year earlier.

Expectations of an immediate rate increase eased after oil prices fell on Monday as the US and Iran paused strikes. Traders were pricing roughly a one-in-three chance of a July hike, leaving a hold as the more likely result.

The key question is whether June’s softer inflation reading marks a sustained decline or a temporary improvement before higher energy costs work their way through the economy.

September is the earliest meeting at which markets see a stronger possibility of an increase. The Fed’s September 15-16 meeting will include updated projections for growth, inflation, unemployment and interest rates.

A hike would become more likely if oil prices rebound, inflation stays above target or the labour market remains strong enough to absorb higher borrowing costs.

Brett House, an economics professor at Columbia Business School, said the inflation challenge could put the Fed at odds with US President Donald Trump’s preference for lower rates.

“It sets up a potential conflict between Trump and the Fed, where his desire for lower interest rates is unlikely to be realised anytime soon,” House said.

Morgan Stanley Research believes financial markets may be overstating the risk of another increase. It expects the Fed to hold rates for the rest of 2026 as inflation moderates, before potentially delivering two cuts in 2027.

“We expect a lower inflation trajectory that keeps policy on hold this year, potentially followed by two rate cuts in 2027 as inflation gradually normalises,” said Michael Gapen, chief US economist for Morgan Stanley Research.

The bank argues that financial markets have already tightened borrowing conditions without the Fed having to raise its official rate. Its financial conditions index suggests that changes since the Iran conflict began have had an effect comparable to four increases of 25 basis points each.

Higher bond yields lift financing costs for governments, businesses and households. This can restrain demand in much the same way as a central bank rate rise.

Morgan Stanley expects easing inflation, cooling housing costs and a softer labour market to support a prolonged pause. It forecasts the 10-year US Treasury yield declining to about 4.25% by the end of 2026 and 4.20% in 2027.

The CBUAE’s Base Rate influences borrowing and saving costs across the country, but every mortgage, personal loan or deposit rate does not change by the same amount or at the same time. Banks also consider funding costs, liquidity, competition and the borrower’s risk profile.

If the Fed holds, the CBUAE is likely to leave its Base Rate at 3.65%. Existing variable-rate loans may see little immediate change.

If the Fed raises rates, the CBUAE would be expected to make a corresponding adjustment. New loans and some existing variable-rate facilities could become more expensive. A US rate cut would probably move UAE policy rates lower, gradually reducing borrowing costs while weighing on savings returns.

Many variable UAE mortgages use the Emirates Interbank Offered Rate, or Eibor, plus a fixed bank margin. Monthly payments can change when the relevant Eibor rate resets.

Fixed-rate borrowers remain protected during their fixed period. They may face a different rate once that period ends, depending on their contract and prevailing market conditions.

A July pause alone is unlikely to bring broad mortgage relief. Eibor is influenced by the CBUAE’s policy rate, expectations for future Fed decisions and liquidity in the UAE banking system.

Borrowers approaching the end of a fixed-rate period should check the new rate, the relevant Eibor tenor and the bank’s margin. These figures determine the payment rather than the Base Rate alone.

For savers, a prolonged pause may support fixed-deposit and savings-account returns. Banks still set their own rates, terms and minimum-balance requirements.

The most likely immediate outcome is no change in either country. The later direction remains uncertain: markets see a possible increase, while Morgan Stanley expects a pause through 2026 followed by cuts in 2027.