Fed Rate Hike To Raise Costs For UAE Borrowers, Boost Savers

(MENAFN- Khaleej Times) UAE consumers are bracing for higher borrowing costs as financial markets overwhelmingly expect the US Federal Reserve to raise interest rates by 25 basis points on Wednesday, a move that would likely be mirrored by the UAE Central Bank because of the dirham's peg to the US dollar.

The anticipated increase would lift the federal funds rate to 3.75-4.00 per cent and, if matched locally, raise the UAE Central Bank's Base Rate from 3.65 per cent to 3.90 per cent. According to analysts, it would mark the first increase in the UAE policy rate cycle since July 2023.

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Economists say the decision is unlikely to shock local markets because banks and investors have already been pricing in tighter monetary conditions. However, it could gradually increase financing costs for homeowners, businesses and borrowers with loans linked to the Emirates Interbank Offered Rate (EIBOR).

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Madhur Kakkar, Founder and CEO of Elevate Financial Services, said:“Fed funds futures put the probability of a 25 basis-point Federal Reserve rate increase on Wednesday at 94 per cent, which would lift the US policy range to 3.75-4.00 per cent.”

He added that because of the currency peg,“the Central Bank of the UAE is likely to closely follow the move, taking the Base Rate applicable to the Overnight Deposit Facility from 3.65 per cent to 3.90 per cent, subject to its formal announcement.”

Kakkar noted that markets have already adjusted to the prospect of higher rates.“Three month EIBOR has been trading near 3.94 per cent, roughly 30 basis points above the current Base Rate, signaling that money markets have already factored in tighter conditions.”

The impact on households is expected to emerge gradually rather than immediately.

“Depositors are likely to see improved savings and term deposit returns sooner than borrowers experience higher repayment costs,” Kakkar said.“For households, the effect will come at the next reset date for EIBOR linked loans and mortgages, not on the evening of the policy decision.”

For homeowners, even small rate moves can have a noticeable effect over time. Kakkar said that on a Dh1.5 million mortgage with 25 years remaining, a full quarter-point increase would add about Dh210 to monthly repayments, or roughly Dh2,500 a year.

Other analysts expect variable-rate mortgage holders and businesses to be among the most affected groups.

Hamza Dweik, Head of Trading (MENA) at Saxo Bank, said:“For the UAE, the impact is more immediate because the dirham is pegged to the US dollar, meaning any Fed move is usually mirrored by the UAE Central Bank. A 25-basis-point increase would keep borrowing costs elevated across mortgages, personal loans, and business lending,” he said.

Rising interest payments

As an example, Dweik said that a Dh2 million variable-rate mortgage could cost borrowers several thousand dirhams more a year in interest payments following a quarter-point increase. He added that sectors such as real estate, construction and SME financing remain particularly sensitive to borrowing costs.

Vijay Valecha, Chief Investment Officer at Century Financial, said the UAE's banking system is likely to feel the effects quickly because local rates move closely with US policy.“The dirham is pegged to the dollar, so the UAE Central Bank typically moves its Base Rate in step with the Fed,” Valecha said.“When it rises, lending rates across the system rise too.”

Valecha said existing borrowers on variable-rate mortgages would likely see monthly payments increase at their next reset date, while corporates and SMEs using EIBOR-linked financing should prepare for higher funding costs. He added that savers could benefit from improved deposit rates as banks adjust to the new interest-rate environment.

The bigger question for borrowers may be what comes after this week's decision. Dweik said:“The bigger issue for the UAE is not whether rates rise by another 25 basis points tomorrow, but how long they remain elevated.”

Kakkar echoed that view, saying the Federal Reserve's updated economic projections would be closely watched.“If the new projections reinforce a higher for longer outlook, UAE borrowers on three-and six-month EIBOR resets should assess their repayment capacity against the prospect of rates remaining elevated into 2027.”

Higher for longer

For UAE consumers, that means tomorrow's move may matter less than the likelihood that borrowing costs stay higher for longer, even as savers enjoy some of the best returns on deposits in years.

Kakkar noted that depositors are likely to benefit sooner than borrowers feel the impact of higher rates, with banks expected to improve returns on savings accounts and fixed deposits as funding costs adjust. Higher deposit rates could encourage households to park more cash in term deposits and other low-risk savings products, offering a welcome boost to savers after years of relatively modest returns.

For borrowers, however, the adjustment is likely to be more gradual, with mortgage and loan repayments rising only when EIBOR-linked facilities reach their next reset date. While the expected rate increase may add only a few hundred dirhams a month for some homeowners, policymakers and consumers alike will be watching closely for signs that rates remain elevated into 2027, potentially prolonging the period of costlier borrowing while preserving attractive returns for savers

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