TLDR:
UAE cuts base rate after Fed move
Short-term lending rate remains above base
Fed’s cooling inflation prompts global impact
ABU DHABI (The Thursday Times) — The Central Bank of the UAE (CBUAE) has made a strategic decision to cut its Base Rate on the Overnight Deposit Facility (ODF) by 25 basis points, lowering it from 4.90 percent to 4.65 percent. Effective from Friday, the reduction aligns closely with a similar rate cut by the U.S. Federal Reserve, which also trimmed its Interest Rate on Reserve Balances (IORB) by 25 basis points.
This policy shift from the CBUAE signals an immediate adjustment to its monetary policy, marking the UAE’s alignment with the Federal Reserve’s approach as a mechanism to influence liquidity and economic growth. The Base Rate provides a benchmark for overnight money market interest rates across the UAE and acts as an economic stabiliser, especially critical given the broader impacts of the Fed’s decision on global interest rates.
Following the Fed’s lead
Earlier today, the U.S. Federal Reserve announced its second rate cut for the year, aiming to counterbalance signs of cooling inflation. This 25-basis-point reduction brought the Fed’s target range for the federal funds rate to between 4.5 and 4.75 percent. Though smaller than the Fed’s previous September cut, this adjustment underscores the Fed’s continued effort to navigate a complex economic environment, where inflation appears to be softening but remains a persistent consideration. The Fed’s latest move serves as an anchor point, influencing not only the U.S. economy but also shaping the monetary policies of countries like the UAE, whose central bank closely monitors the Fed’s lead.
Balancing short-term lending rates
In tandem with the base rate adjustment, the CBUAE maintained the interest rate for borrowing short-term liquidity, setting it at 50 basis points above the base rate for all standing credit facilities. This rate, which stands above the ODF, is designed to ensure that banks within the UAE maintain access to essential short-term funding. By setting this slightly higher threshold, the CBUAE offers commercial banks flexibility in meeting their short-term liquidity needs while reinforcing stability within the UAE’s banking sector.
Monetary policy implications and market reaction
The Fed’s decision to reduce its benchmark rate aligns with broader economic indicators suggesting inflationary pressures are easing, though cautiously. By moving to a rate range of 4.5 to 4.75 percent, the Fed hopes to create breathing room for businesses and consumers in an environment of moderated growth. This approach offers relief to sectors sensitive to borrowing costs, while also setting the stage for other central banks globally to adjust their policies in response.
In the UAE, the CBUAE’s base rate change also echoes a cautiously optimistic outlook for economic activity. A lower ODF base rate may help reduce borrowing costs, stimulating lending and potentially enhancing liquidity in various sectors. For the UAE, which remains sensitive to both local and international economic dynamics, aligning with the Fed’s reduction reflects a desire to stay attuned to global monetary trends while prioritising the UAE’s economic resilience and stability.
