Gulf Nations Brace for Prolonged Period of Elevated Interest Rates Following Fed’s Lead

Economists are predicting that the United Arab Emirates (UAE) and other Gulf Cooperation Council (GCC) countries will endure an extended period of elevated interest rates, closely mirroring the actions of the United States Federal Reserve.

Over the past couple of years, Gulf central banks have been gradually raising interest rates in tandem with the Federal Reserve’s efforts to combat inflation, which had soared to multi-decade highs. As the currencies of the UAE and other Gulf nations are pegged to the US dollar, they closely follow the Fed’s monetary policy decisions.

The Central Bank of the UAE (CBUAE) recently announced its decision to maintain the Base Rate applicable to the Overnight Deposit Facility (ODF) at 5.40 percent, effective from Thursday, September 21. This move followed the UAE Central Bank’s decision to raise rates on July 26 by 25 basis points, increasing it from 5.15 percent to 5.40 percent, in response to the US Federal Reserve Board’s announcement of a 25-basis-point increase in the Interest on Reserve Balances (IORB).

Oxford Economics has indicated that the Federal Reserve temporarily paused its rate-hiking cycle, providing some relief to GCC countries, which had witnessed their interest rates reach the highest levels in over two decades.

Scott Livermore, chief economist for the Middle East at Oxford Economics, noted, “However, inflation is rising once more, so we cannot rule out another Fed rate hike before the end of 2023, which could force the dollar-pegged nations to adapt accordingly until a strategy to cut rates is gradually rolled out. The Central Bank of the UAE kept its rate at 5.4 percent this week, and we expect other GCC banks will follow suit.”

Livermore added, “We think the GCC countries will have to become accustomed to an extended period of higher interest rates. As expected, the US Federal Reserve left policy rates unchanged at its latest meeting, but it hasn’t ruled out further rate hikes.”

Oxford Economics also stated that the ongoing easing of inflation and a continuing cooling in labor market conditions are likely to keep the Federal Reserve cautious in its approach. Livermore suggested, “We anticipate the Fed will gradually cut interest rates starting in mid-2024.”

As Gulf nations continue to track the Fed’s moves closely, they prepare for a challenging period of managing their economies in the face of global economic fluctuations.

—
Vinod Kumar (UAE)