The UAE Central Bank has announced a 25 basis point reduction in its benchmark interest rate, mirroring the US Federal Reserve’s recent decision to lower rates in a bid to stimulate economic activity amidst easing inflationary pressures. This adjustment reduces the base rate for the overnight deposit facility to 4.40%, effective Thursday. Meanwhile, the short-term borrowing rate for liquidity remains set at 50 basis points above the base rate across all standing credit facilities.
This decision is consistent with the Federal Reserve’s move to cut the interest rate on reserve balances by 25 basis points. The UAE’s monetary policy framework, which is closely tied to the Fed due to the dirham’s peg to the US dollar, ensures synchronization with US interest rate shifts.
Monetary Policy and Economic Context
The UAE Central Bank’s base rate, anchored to the Federal Reserve’s reserve balances, serves as a critical benchmark, reflecting the central bank’s monetary policy stance. It also provides a foundational floor for overnight money market rates within the UAE. The move aligns with the Federal Reserve’s broader strategy of easing rates to prevent a potential economic recession while fostering a “soft landing” for the US economy.
After maintaining rates at a 22-year high, the Fed initiated its easing cycle with a 50 basis point cut in September, followed by a 25 basis point reduction last month. These decisions demonstrate the Fed’s confidence in managing inflationary risks and stabilizing economic growth.
Srijan Katyal, Global Head of Strategy and Client Services at ADSS, noted that this shift signifies diminished inflationary concerns. He added that the rate cut could stimulate risk assets, further strengthening stock market performance and benefiting small-cap stocks.
Positive Economic Indicators for the UAE
The UAE continues to drive its economic diversification efforts, resulting in accelerated growth within the non-oil sector. The Central Bank projects a 4% GDP growth rate for 2024, an upward revision from its earlier forecast of 3.9%. Inflation estimates for 2024 have also been slightly reduced to 2.2%, reflecting ongoing disinflationary trends in key sectors such as food, beverages, and non-tradables.
Preliminary data indicates that the UAE’s real GDP reached Dh430 billion ($117.08 billion) in the first quarter of 2024, marking a 3.4% annual growth rate. The non-oil sector expanded by 4% year-on-year during the same period, underscoring the effectiveness of the UAE’s economic diversification initiatives.
Gulf Cooperation Council Central Banks Adjust Policies
In the Gulf region, most central banks align their monetary policies with the Federal Reserve due to currency pegs to the US dollar, with Kuwait being the notable exception. On Wednesday, the Saudi Central Bank (SAMA) reduced its repo rate to 5% and its reverse repo rate to 4.5%. Similarly, Qatar, Bahrain, and Kuwait adjusted their rates to align with global monetary trends.
Qatar’s Central Bank reduced its repo rate by 30 basis points to 4.85%, while Bahrain lowered its overnight deposit rate to 5%. Kuwait adopted a more gradual approach, adjusting its discount rate to 4% to balance local economic conditions with sustainable growth objectives.
Regional Investment and Diversification Initiatives
Gulf economies, heavily reliant on oil revenues, continue to invest in large-scale diversification projects to reduce dependence on energy exports. Countries like Saudi Arabia and the UAE are channeling substantial resources into transformative initiatives, funded through a combination of government equity, commercial loans, and project bonds. These efforts aim to strengthen economic resilience and ensure long-term sustainability in a rapidly changing global economic landscape.
Published On: Dec 19, 2024
Source: https://www.thenationalnews.com/business/economy/2024/12/18/uae-central-bank-lowers-interest-rates-following-us-federal-reserve-move/
