The<a href="https://www.thenationalnews.com/business/economy/2024/09/25/uae-central-bank-revises-up-its-2024-gdp-growth-forecast-to-4-on-non-oil-sector-boost/" target="_blank"> UAE Central Bank</a> reduced its benchmark interest rate by 25 basis points, after the <a href="https://www.thenationalnews.com/business/economy/2024/09/17/gulf-interest-rate-cuts-fed/" target="_blank">US Federal </a>Reserve’s move on Thursday to cut rates to boost <a href="https://www.thenationalnews.com/business/economy/2024/09/09/uaes-economy-grows-34-in-q1-on-non-oil-sector-boost/" target="_blank">business conditions </a>amid easing inflationary pressures. The banking regulator reduced its base rate for the overnight deposit facility to 4.65 per cent, effective from Friday. It maintained the interest rate applicable to borrowing short-term liquidity from the regulator at 50 basis points above the base rate for all standing credit facilities, the regulator said on Thursday. This move aligns with the Fed’s decision on Thursday to lower the interest rate on reserve balances by 25 basis points. The UAE Central Bank base rate, which is anchored to the Fed's interest on reserve balances, signals the general stance of the Central Bank's monetary policy and provides an effective interest rate floor for overnight money market rates in the UAE. The UAE Central Bank typically aligns its interest rate decisions with those of the Fed because of the dirham's peg to the US dollar. The Fed began its easing cycle with a 50 basis points cut in September on slowing inflation after keeping rates at a 22-year high for more than a year. The US entered a monetary easing cycle as the Fed aimed to prevent a recession and guide the world’s largest economy to a soft landing. Most Gulf central banks align their policy rate changes with the Fed, as their currencies are pegged to the US dollar. Kuwait is the exception among the six-member economic GCC bloc, as its dinar is linked to a basket of currencies. Despite experiencing much lower inflation than other regions, these oil-rich economies kept pace with the Fed’s aggressive rate increase cycle. The Saudi Central Bank, better known as Sama, on Thursday matched the Fed rate cut, reducing its repurchase agreement (repo) rate by 25 basis points to 5.25 per cent and its reverse repo rate by a similar margin to 4.75 per cent. The Qatar Central Bank reduced the repo rate by a 30 basis points to 5.15 per cent. It also reduced its deposit rate to 4.9 per cent, and the lending rate to 5.4 per cent. The Central Bank of Bahrain cut its key rate on overnight deposits by 25 basis points to 5.25 per cent, effective November 10. The CBB said that the move is part of its measures to maintain monetary and financial stability in Bahrain, considering developments in global financial markets. In the Gulf region, home to one third of the world’s proven oil reserves, government spending is primarily driven by oil prices rather than monetary policy. Economies like Saudi Arabia, the world’s largest oil exporter, and the UAE, the Arab world’s second-largest economy, are investing tens of billions of dollars in projects aimed at economic diversification. These initiatives are often funded through a mix of government equity, commercial loans and project bonds. Lower financing costs are expected to bring some relief to these undertakings. Fed’s decision comes against the backdrop of a massive underperformance from the labour market in October and a wider disinflationary trend – with the consumer price index falling to 2.4 per cent for September, industry experts said. “The decision displays the confidence the Fed has that elevated levels of inflation have been successfully wrangled down from 2022 peaks,” said Neal Keane, head of global sales trading at Abu Dhabi-based international securities brokerage ADSS. “The Fed will likely await the market’s responses and upcoming CPI and non-farm payrolls data in addition to any significant changes to new President Elect Trump’s policy.” With markets reacting aggressively to Donald Trump’s election win with higher US yields, a stronger dollar and surging stocks, the Fed appears to be wary of inflationary threats and further rate cut decisions are to be taken on a meeting-by-meeting basis, Mr Keane added. “The Fed may well hike again in December, but the pace of cuts is likely to slow into 2025, with a cut at every other meeting a possibility, based on today’s statement and comments from Fed chair during the press conference.” The UAE has been focused on diversifying its economy from oil, with non-oil sector growth picking up significantly in recent quarters. Its economy is expected to grow 4 per cent this year, up from the previous estimate of 3.9 per cent in June, the latest report by the UAE Central Bank showed. The regulator has also revised its inflation forecast for the Emirates to 2.2 per cent, from 2.3 per cent for 2024. Inflation forecasts may be revised downwards if disinflationary trends in food, beverage and key non-tradable components continue to persist, it said in September. In the first quarter, the country's economy expanded by 3.4 per cent, with real GDP reaching Dh430 billion ($117.08 billion), the Ministry of Economy said in September, quoting preliminary estimates from the Federal Competitiveness and Statistics Centre. The non-oil sector expanded by 4 per cent year on year during the quarter. In the first half of this year, the country’s non-oil foreign trade hit a record Dh1.4 trillion, up 11.2 per cent on an annual basis amid a 25 per cent rise in non-oil exports on new comprehensive economic partnership agreements, the UAE Government Media Office said in August. The country, as part of its national economic goals, is pursuing the target of Dh4 trillion in foreign trade by 2031.