UAE Banks Absorb Fed Rate Moves As Dubai Mortgage Market Decouples From US Policy

(MENAFN- Khaleej Times) UAE banks are increasingly managing interest rate movements within their own margins rather than passing each change directly on to borrowers, according to industry analysts, even as the dirham's peg to the dollar keeps the UAE's base rate formally tied to the US Federal Reserve.

This partly reflects the current interest-rate environment, with rates having stabilised at levels well below the double-digit highs seen in previous decades, giving banks more flexibility to compete on mortgage pricing without reacting to every Fed decision.

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When the Fed held its policy rate steady again in August, the decision had relatively little impact on discussions across Dubai's mortgage market, despite rate-cut expectations continuing to dominate global headlines, said mortgage service provider Lomond.

“It has barely registered. Mortgage rates have generally remained unchanged, and most of our buyers aren't tracking the Fed at all. It's not a question clients ask anymore,” said Adriaan Rossouw, head of mortgages at Lomond.

That marks a notable shift in a market where the UAE's base rate continues to move in line with Federal Reserve decisions. The policy relationship remains intact, but the extent to which those changes are reflected in local mortgage pricing has weakened.

According to Cushman & Wakefield Core and Reidin data, the share of mortgage transactions is decreasing over the past few years, slipping from 63 per cent to 52 per cent between H1 2022 and H1 2026.

On April 29, the Central Bank of the UAE (CBUAE) decided to maintain the Base Rate applicable to the Overnight Deposit Facility (ODF) at 3.65 per cent.

This decision was taken following the US Federal Reserve's announcement to keep the Interest Rate on Reserve Balances (IORB) unchanged. The CBUAE has also decided to maintain the interest rate applicable to borrowing shortterm liquidity from the CBUAE at 50 basis points above the Base Rate for all standing credit facilities.

The UAE's most recent base rate cut, in December, was 25 basis points, from 3.90 per cent to 3.65 per cent, while current fixed mortgage rates of around 3.5 to 4.2 per cent for shorter terms already point to a relatively stable lending environment.

Forces driving demand

With interest rates becoming a less dominant factor, Rossouw of Lomond pointed to three forces currently shaping Dubai's mortgage market.

It includes new residents moving to the UAE for career opportunities, quality of life and its tax environment; existing residents changing homes due to marriage, growing families or a longer-term decision to settle in Dubai; and buyers responding to more favourable pricing in parts of the market against the recent geopolitical backdrop.

Together, he said, these factors are having a greater influence on mortgage demand than the timing of individual Fed decisions.

Waiting for a rate cut?

For buyers delaying a purchase in anticipation of a future Fed rate cut, the potential benefit may be limited, added Rossouw.

Expectations for the Fed's next move remain mixed.

Morgan Stanley currently expects rates to stay unchanged through 2026, with possible cuts in 2027, while other analysts continue to flag the risk of further increases if inflation remains persistent. There is therefore no clear consensus that materially lower rates are imminent.

Even if rates do fall, according to Rossouw, the effect on UAE mortgage pricing may be modest.

For buyers, he said, this means waiting solely for a future rate cut may not necessarily result in significantly cheaper financing.

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