The UAE is set to experience lower borrowing costs as the US Federal Reserve and the Central Bank of the UAE (CBUAE) are expected to cut interest rates. This development will make it more affordable for consumers to obtain loans for personal use, auto purchases, and mortgages. With the UAE dirham pegged to the US dollar, the country is likely to follow the US Federal Reserve’s lead after its meeting on September 18.
This marks the first expected reduction in interest rates in the UAE in three years. Between mid-2019 and mid-2021, the UAE previously cut rates in response to US Federal Reserve policies, which were designed to mitigate the economic impacts of the COVID-19 pandemic. The last adjustment occurred on July 27, 2023, when the CBUAE raised rates by 25 basis points (bps), in line with the US Fed’s actions.
Projected Size of Rate Cuts
Most analysts predict a reduction of 50 basis points (bps) in the coming week. Vijay Valecha, Chief Investment Officer at Century Financial, stated that a 50 bps cut by the US Federal Reserve is expected, with a 67% probability according to the CME FedWatch tool. George Pavel, General Manager at Capex.com Middle East, echoed this sentiment, suggesting the UAE Central Bank will likely follow suit, with the possibility of either a 25 bps or 50 bps cut being discussed.
Potential Impact of Rate Cuts
Mazen Salhab, Chief Market Strategist for MENA at BDSwiss, noted that a 25 bps cut would provide economic stimulus while maintaining market stability, though the likelihood of a larger 50 bps cut remains significant. Market participants are keenly focused on the Fed’s upcoming economic projections and decisions.
Consumer Benefits of Lower Interest Rates
Increased Affordability for Borrowers
With anticipated rate reductions, consumers in the UAE are likely to benefit from lower interest rates on personal loans, mortgages, auto loans, and credit cards. This would result in lower monthly payments for new loans, increasing consumers’ purchasing power. Valecha predicts mortgage rates will decrease further into 2024, potentially making homeownership more attainable and stimulating the Real Estate Sector in Dubai, UAE.
Opportunities for Refinancing
For existing borrowers, lower rates may present refinancing opportunities. George Pavel suggested that those with variable-rate loans could see immediate benefits from reduced borrowing costs. Borrowers with fixed-rate loans could also take advantage of the lower rates by refinancing to reduce their interest expenses.
Impact on Existing Borrowers and Loan Demand
Existing borrowers with variable-rate debt will be the primary beneficiaries of the interest rate cuts, as their monthly payments are expected to decline. Pavel noted that credit card users might also experience lower interest charges. Meanwhile, fixed-rate borrowers may not see immediate changes, though they could benefit from refinancing at more favorable rates.
Increased Loan Demand
The anticipated decline in interest rates, combined with a strong local economy, is likely to drive higher demand for personal and mortgage loans in the UAE. As borrowing becomes more affordable, it could lead to increased consumption and investment in real estate. Lower interest rates may also boost demand for personal loans, credit cards, and auto loans, contributing to heightened economic activity across the region.
The expected reduction in interest rates is set to benefit both new and existing borrowers by making loans more affordable and accessible. As the UAE aligns with US Federal Reserve policies, the broader economy may experience a surge in loan demand, further stimulating growth in sectors like real estate and consumer spending.
Published on: 17 Sep 2024
Source: https://www.khaleejtimes.com/business/finance/uae-loans-mortgages-set-to-get-cheaper-as-interest-rates-likely-go-down
