The Central Bank of the UAE announced on Wednesday, October 28, that it would keep the country’s base interest rate unchanged at 3.9 per cent, following the US Federal Reserve’s decision to hold rates steady. The decision reflects the UAE dirham’s peg to the US dollar.

The UAE’s base rate, which applies to the Overnight Deposit Facility (ODF), is one of the country’s key monetary policy tools. It is linked to the Federal Reserve’s Interest on Reserve Balances (IORB) rate and serves as the effective floor for overnight money market rates in the UAE.

Impact on bank loans and deposits

With interest rates remaining unchanged, borrowing costs for businesses and consumers are not expected to change significantly in the short term. Lending and deposit rates are also expected to remain largely stable in the near future.

US Interest Rate Hike Expected in December

Analysts say markets widely expect a 0.25-percentage-point increase in US interest rates in December, which would bring the target range to 4% to 4.25%.

Vijay Valecha, Chief Investment Officer at Century Financial, said US economic data provide grounds both for raising interest rates and for keeping them unchanged.

He said US core inflation rose 0.3% in September for the second consecutive month, while housing costs also accelerated. Headline consumer prices increased 0.6% month on month due to higher energy costs.

By contrast, employment growth slowed sharply, with 29,000 new jobs added. Revisions to previous months also showed that 60,000 fewer jobs had been created than initially reported. Annual wage growth remained at 3%.

Valecha stressed that although the US economy continues to grow, signs of slowing momentum in the labour market justify a cautious approach and waiting for further economic data.

Impact of US Monetary Policy on the UAE Economy

Hamza Dweik, Head of Trading for the Middle East and North Africa at Saxo Bank, said the dirham’s peg to the US dollar creates a close link between the two countries’ monetary policies.

According to Dweik, changes in Federal Reserve interest rates can directly affect financing conditions for households and businesses in the UAE. The impact is particularly significant in areas such as mortgages, corporate lending, financing for small and medium-sized enterprises, and other interest-rate-sensitive sectors.

Dweik added that the UAE economy is generally well positioned to withstand tighter financial conditions.

He explained that while higher interest rates can reduce demand for borrowing and increase the cost of debt-funded investment, they may also offer more attractive returns to savers and investors holding assets in cash or short-term fixed-income instruments.

The analyst said the future direction of US interest rates and the Federal Reserve’s decision-making process in the coming months matter more to UAE markets than the outcome of any single policy meeting.