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Anticipated Decline in Loan and Credit Card Interest Rates in UAE

As the global economic landscape continues to evolve, analysts predict a positive shift for UAE consumers in 2024, with a projected 100 basis points reduction in interest rates. The expected decrease is attributed to potential rate cuts by the US Federal Reserve and the Central Bank of the UAE (CBUAE), responding to a decline in inflation in the United States, the world’s largest economy.

Given the pegging of the UAE dirham to the US dollar, the CBUAE typically aligns its monetary policy with that of the Federal Reserve. Consequently, as the Fed is anticipated to implement rate cuts in the coming year, a similar move by the UAE is expected.

The recent decision by the Fed to maintain interest rates at a 22-year peak and the CBUAE’s corresponding decision on the Base Rate affirm this correlation. The central banks’ actions underscore their commitment to balancing economic considerations in the face of evolving global conditions.

Interest rates in both the UAE and the US have experienced an upward trend following the pandemic, aimed at curbing multi-decade-high inflation. However, the tide is expected to turn in 2024, potentially resulting in a 50-100 basis points rate cut.

Steven Rees, Head of Investments for the Middle East and North Africa at JP Morgan Private Bank, suggests that the Fed may implement more rate cuts than initially anticipated, with a total of 75 basis points in 2024. This outlook is based on the expectation of a resilient economy capable of avoiding a recession.

Rania Gule, Market Analyst at XS.com, predicts that the Fed will maintain interest rates until the first half of 2024, followed by a 50 to 100 basis points rate cut, influenced by core inflation readings.

Vijay Valecha, Chief Investment Officer at Century Financial, emphasizes the direct impact on UAE consumers. When central banks lower interest rates, the rates on personal loans, mortgages, and credit cards are likely to follow suit. Lower interest rates translate to reduced borrowing costs for consumers, potentially benefiting those with variable interest rates through the opportunity to refinance at lower rates.

Valecha explains that the impact of lower interest rates varies depending on the type of borrowing—short-term or long-term. Short-term loans, such as credit cards and auto loans, are tied to short-term rates, which tend to decline faster than long-term rates during rate cuts.

In the context of mortgages in the UAE, which are linked to the Emirates Interbank Offered Rate (Eibor), lower rates could lead to reduced monthly payments, increased purchasing power, and improved refinancing opportunities. Valecha concludes that lower interest rates could stimulate housing demand and affordability, providing a positive outlook for consumers in the UAE.

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