The UAE and most GCC countries are expected to increase key interest rates this week in line with the US Federal Reserve, which will announce a decision on Wednesday after a two-day Federal Open Market Committee meeting starting on Tuesday.
Analysts and economists say the Fed may opt for a fourth interest rate hike to 2.50 per cent this year and go for a slower pace in 2019. They further say that the cost of credit for businesses may go up if the central banks of the region follow the Fed’s policy on interest rates, which currently stands at 2.25 per cent.
Citing waning growth, a trade war, tame inflation and an increasingly scary geopolitical scene, experts said the central bank of world’s No.1 economy may opt for only two hikes next year or even pause the current tightening cycle.
“We have seen three rate hikes of 25 basis points each in the US dollar interest rates so far and the fourth is expected this week. This would take the benchmark interest rates higher by a full percentage point this year,” Anita Yadav, head of fixed-income research at Emirates NBD, told Khaleej Times on Sunday.
Given the UAE dirham’s peg to the dollar, she said the Central Bank of the UAE has been raising rates in tandem with the US Fed rate. It has already been increased three times to 2.50 per cent in line with Fed announcements in March, June and September this year.
“While the UAE central bank’s policy rate has risen by 75 basis points this year so far, the 3-month Eibor rate has risen less than that mainly as a result of the high liquidity in the UAE banking system this year,” Yadav of Emirates NBD said.
She said economic growth in the US is on strong footing with unemployment level being at multi-decade low. Also core inflation is marginally above the Fed’s target level of 2 per cent, which augurs well for the US Federal Reserve to continue raising interest rates in the first half of 2019.
“We expect at least two interest rate hikes in the US in 2019,” she said.
Shailesh Dash, an entrepreneur and financier, said it is expected that the rates will go higher, which obviously will have a significant impact on emerging markets including the UAE businesses in general and the manufacturing and trading in particular.
“It’s important for businesses to look closely at their leverage and cashflows in the current economic environment,” Dash told Khaleej Times.
Monica Malik, chief economist at Abu Dhabi Commercial Bank (ADCB), said the Fed is expected to raise the benchmark interest rates by 25bps to the 2.25-2.50 per cent range at its December 18-19 meeting.
“We expect most GCC central banks to raise their benchmark rates in line with the Fed. The Central Bank of the UAE is expected to increase its repo rate [lending rate] by 25bps to 2.75 per cent,” she said.
Atik Munshi, senior partner at Crowe, said the United States is a global player, hence any change in Fed rates affects most countries. “During this year and the last Fed rate hikes have happened nearly every quarter; December 19 meeting might not be an exception. About 25 basis point increase is the general expectation, let’s wait a few more days to get the real picture,” Munshi said.
To a question, he said the future of Fed rate hikes in 2019 depends on the performance of US economy, possibly 2 or 3 increases in 2019 can be expected.
“It is very likely that UAE too will increase in interest rates based on Fed hike, credit will become more dearer; credit cards, loans, etc., would become more expensive,” Munshi told Khaleej Times.
He said the current economy in the UAE needs more banking support, an increase will have a marginal effect, however the market sentiment might consider this as a negative sign.
Economists say that the Fed is aware of the specter of slowing growth in China and Europe, a chaotic British exit from the European Union, political turmoil in France and Italy’s budget woes.
“In the wake of scary geopolitical situations, Fed may have no other options but to prefer slower hike in interest rates next year,” they added.
Malik said the tone of the Fed meeting is expected to be dovish, consistent with recent communication from FOMC members. The median dot plot is likely to be revised down to indicate two 25bps hikes for 2019 (three currently) and one in 2020 (two currently).
“We continue to see two additional 25bps hikes in 2019 after the December hike with the rate-hiking cycle likely coming to an end thereafter. Following the FOMC meeting, the market’s attention will be on the spending bill, which is set to expire on 21 December,” Malik concluded.
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