Higher-For-Longer Rates May Reshape UAE Growth As Global Economy Adapts

(MENAFN- Khaleej Times) Global interest rates are likely to stay elevated well into 2027 as central banks respond to stronger nominal economic growth rather than a looming downturn, according to Abu Dhabi-based investment firm Lunate's latest economic outlook.

The outlook, titled“Even Higher for Even Longer”, argues that the world economy has entered a new regime in which inflation, wages, investment spending and growth are all running above the levels that prevailed during the ultra-low-rate era following the global financial crisis.

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For the UAE, the implications are significant. As the dirham remains pegged to the US dollar, interest-rate decisions by the US Federal Reserve are mirrored by the UAE Central Bank, influencing borrowing costs for businesses, property developers and consumers.

Lunate expects the Fed to raise rates one more time to 4.25% before holding them there through much of 2027.“We expect one further 25bp hike at the December meeting, taking the rate to 4.25%, which we view as the peak for this short hiking phase,” the report said. It added that policymakers are unlikely to begin cutting rates until“late 2027 at the earliest”.

Crucially, the investment firm does not view higher rates as a sign of economic weakness. Instead, it argues that borrowing costs are increasing because economic activity remains robust.

“Putting it all together, our core view remains that this economic cycle continues to extend rather than roll over,” the report said.“Not simply higher policy rates for longer, but a genuinely higher nominal growth regime.”

The UAE could be among the beneficiaries of such an environment. Oil prices have risen sharply amid renewed geopolitical tensions in the Middle East, with Brent crude up more than 44% year-to-date, according to the report. Higher oil revenues would support government spending, infrastructure investment and liquidity across Gulf economies.

Lunate identified three factors behind persistent inflation and higher rates:“persistent wage growth, a renewed escalation in the Middle East that has kept oil prices elevated, and a capex investment cycle running hot.”

The report forecasts nominal GDP growth above 5% globally over the next four quarters and believes US 10-year Treasury yields will remain above 4.5%, levels last seen before the 2008 financial crisis.

For the UAE property market, the picture is mixed. Higher borrowing costs typically weigh on mortgage affordability and financing conditions. However, continued population growth, strong investor demand and economic expansion could offset some of those pressures. The report notes that higher rates driven by stronger growth are“a fundamentally different, and healthier, phenomenon than higher rates driven by inflation alone”.

The outlook may also prove supportive for Gulf sovereign wealth funds and private credit investors. Lunate said private credit tends to perform better during hiking cycles because many loans carry floating interest rates, allowing lenders to benefit from higher benchmark rates.

While acknowledging that elevated rates will create challenges for highly leveraged companies, the firm believes the global economy remains resilient.“We think the more important story is not inflation itself but the level of nominal GDP growth,” it said.“Yields near 5% in the US are a direct reflection of that shift, not an anomaly.”

For the UAE, that suggests an environment in which growth remains solid, energy revenues stay supportive and investment activity continues, even as businesses and consumers adjust to borrowing costs that are unlikely to return to pre-pandemic lows anytime soon.

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