What Impact Will Rate Hike In UAE Have?
Consumers and businesses are going to feel the heat as the Central Bank of UAE hikes interest rates. According to financial experts, the borrowing costs across the financial sector will increase the costs associated with personal, auto and mortgage loans. The impact will be felt by corporations and government alike as it puts pressure on liquidity in the economy. Since tourism and property sectors are cost-sensitive, the immediate impact will be on these two.
While spurt in bank funding costs will result in price increase from real estate developers, properties are to become expensive for foreign investors and residents owing to higher home loan rates. Customer decisions regarding purchase of automobiles will be impacted by 0.5 per cent rise in interest. While savers are set to earn more interest, borrowers will have to pay more interest out of their pockets.
A strong currency will make the UAE less attractive to holiday tourism owing to the rate hike. Travellers from nations with weaker currency will have to spend more to make it to the Gulf. This will have a severe repercussion on the tourism industry that thrives on tourists all-round the year.
Small and medium enterprises will also be impacted by rising borrowing costs from banks or such funding institutions.
Keeping in line with the US Federal Reserve Board’s decision to increase the rate by 25 basis points, the UAE Central Bank also increased the interest rates of Certificates of Deposits which are financial instruments issued by the Central Bank to all the banks operating in the country which helps in transmitting changes in the interest rates to the UAE banking system. The rates of Central Banks of Bahrain, Kuwait, Qatar and Saudi Arabia were also hiked by 25 basis points.
For short-term liquidity borrowing against the Certificates of Deposits, the repo rate has been increased by 25 basis points to 2.25 per cent.
There will be a decrease in demand for investments in properties owing to the hike in interest rates. The margins of businesses will be further pushed down from the current margin and liquidity levels. The impact due to the hike in interest rate may be subsidised with the insurance set to replace the deposit for labour guarantee.
Considering that majority of the population are expats, a certain portion of salary incomes leave for the respective home country within a few weeks of deposit into the accounts. So most of the key transactions are service-related such as auto, personal or mortgage loans and not deposit transactions. Higher costs for these services will limit the options for the customers and force them to be selective and prioritise their income usage.
Such rate hikes are also seen as the reason for an increase in the cost of raising debt from bond markets adding to the already existing slow rate of economic growth.
However, expats who transfer a set amount to their home countries regularly are to benefit from better exchange rates owing to a stronger dollar-pegged dirham.
However, other experts believe that the property market would absorb the impact with the UAE’s reforms such as relaxation of fees and fines, visa, elimination of bank guarantees, waiver on some fees on real estate and aviation transactions and cutting charges levied on businesses.