Consumer in the UAE may not see any relief soon as the US Federal Reserve has decided to keep key rates unchanged, analysts say. Despite the Fed raising rates eleven times in recent years, they have now held them steady for eight of the last nine meetings. This decision comes as inflation in the US has cooled slightly, reaching 3.3 per cent YoY in May compared to over 9 per cent in mid-2022, with the core CPI also cooling to 3.4 per cent. The last rate hike occurred in July 2023, and the economy appears strong enough for the Fed to consider just one rate cut in 2024.
The Central Bank of the UAE (CBUAE) has followed the Fed’s cautious stance by keeping its Base Rate at 5.40 per cent. While this means UAE mortgage rates and corporate loans will remain high, the strong economy should support loan growth. This is due to the strong performance of the non-oil economy and the pegging of the dirham to the US dollar, which is expected to stay strong. Despite the high rates, UAE’s growth is unlikely to be hampered.
The stock market in the UAE rallied despite the prospect of higher rates for a longer period. Strong corporate earnings, advancements in AI, and investor expectations of future rate cuts may have contributed to this rally. Interest rates on 10-year Treasury notes have risen significantly, reaching 4.26 per cent, a notable increase from earlier in the year. This rise has implications for the bond market, with prices falling as rates rise but becoming more attractive for new investments as rates plateau.
The Euro initially strengthened against the US Dollar due to lower-than-expected US inflation but weakened following the Fed’s decision to hold rates steady. The coming months will be crucial in understanding the Fed’s evolving stance, with economic indicators like the CPI release being closely monitored to gauge future rate adjustments. Recent fluctuations in Gulf stock markets reflect a cautious sentiment similar to the US Federal Reserve’s decision to delay policy easing.
Investor reactions to the Fed’s announcement varied across the Gulf, with some markets declining and others seeing slight increases. The Gulf’s close connection to the US dollar due to currency pegs makes them susceptible to changes in US monetary policy, influencing investor sentiment and market trends. Despite challenges, the Gulf’s economic diversification efforts and strong fundamentals offer growth opportunities. Staying informed about global economic developments can help investors navigate the region’s financial landscape with confidence.
