Cheaper UAE Loans Soon As Central Bank Lowers Rate

Borrowing costs in the UAE are set to come down as the Central Bank on Wednesday lowered its interest rates.

In a statement, the UAE Central Bank said that the base rates applicable to the overnight deposit facility has been reduced to 4.15 per cent from 4.4 per cent earlier.

The apex bank's decision comes after the US Federal Reserve lowered its interest rates by 25 basis points on Wednesday, marking its first policy shift of the year. The UAE follows US monetary policy as the dirham is pegged to the US dollar.

This move, prompted by signs of a cooling labour market and mounting political pressure, spurred the Fed to lower the target range for the federal funds rate to 4.00 per cent–4.25 per cent. The last rate change occurred in December 2024, when the Fed trimmed rates to the current level of 4.25 per cent–4.50 per cent.

In its statement, the Federal Open Markets Committee noted that job gains have slowed, and the unemployment rate has edged up but remains low. Inflation has moved up and remains somewhat elevated.

With the UAE dirham pegged to the US dollar, the Federal Reserve's decisions often echo across the Emirates. Analysts anticipate the UAE Central Bank will follow suit, reducing local interest rates and triggering a cascade of economic effects.

Lower borrowing costs are expected to stimulate consumer spending and business investment, particularly in sectors like real estate, retail, and tourism. Mortgage rates could fall, potentially reigniting demand in Dubai's property market, while cheaper credit may encourage expansion among SMEs and large enterprises alike, analysts say.

“Although lower interest rates typically result in a decline in the net interest margins (NIMs) earned by banks, this can be offset by increased loan activity, particularly in the SME sector. Both corporations and individuals can avail loans at more attractive rates. This could benefit UAE residents with mortgages or personal loans with a variable interest rate. Additionally, it could help ease the burden of debt servicing, thereby enhancing asset quality. Moreover, those who wish to invest in property could benefit from a dip in mortgage rates. Even property developers can secure funding at more favorable rates, which could help expedite the launch of projects,” Vijay Valecha, Chief Investment Officer, Century Financial, told Khaleej Times.

While rate cuts typically erode returns from traditional investments, such as fixed deposits, they can translate into gains for the stock market, particularly for growth stocks and dividend-paying companies, he added.

The rate cut also positions the UAE as a more attractive destination for foreign direct investment, with global capital seeking higher returns in stable, growth-oriented markets. A weaker dollar could further boost UAE exports, making non-oil goods more competitive internationally.

However, not all sectors may benefit equally. Savers relying on fixed deposits or bonds may face declining returns, prompting a shift toward equities or real estate. Meanwhile, stock markets are likely to respond positively, though volatility may persist amid global economic uncertainty, analysts say.

For the UAE and its Gulf neighbors, the timing could prove advantageous. Real estate and large-scale infrastructure initiatives may benefit from lower financing costs, encouraging new project launches and accelerating existing developments. Cheaper mortgages are also likely to strengthen demand in both residential and commercial property segments, while households stand to gain from lighter repayment burdens.“With more disposable income, consumer spending on categories such as automobiles, technology, and luxury goods could see a noticeable lift,” Hamza Dweik, Head of Trading MENA, Saxo Bank, told Khaleej Times.

Jordan may feel the impact even more acutely, Dweik said.“For households struggling under heavy debt obligations, lower interest rates could meaningfully ease financial pressure. This improvement in affordability, coupled with the prospect of stronger consumer confidence, could help revive domestic demand in a market where consumption plays a critical role in economic momentum,” he added.

The region's banks will need to adapt to narrower net interest margins, but growing demand for credit may help offset the pressure on profitability. Easier borrowing conditions also point to healthier asset quality, as repayment risks decline.“Investors are likely to adjust their strategies as well, shifting capital away from fixed-income instruments toward equities, real estate, and alternative assets that promise stronger returns in a low-rate environment,” Dweik said.

At a macro level, a US rate cut would deliver a welcome push to regional demand at a time when inflationary risks remain muted.“A weaker dollar may add further upside by supporting crude oil prices, offering a potential revenue boost to Gulf hydrocarbon exporters,” Dweik said.

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