UAE interest rates in the balance as dissent emerges at the US Federal Reserve

Dissent at the Federal Reserve increases the chance that interest rates in the UAE could be raised sooner than expected.

Charles Plosser, a member of the Fed’s rate-setting board, said on Wednesday that he did not think low interest rates should outlast tapering because the US economy has made “considerable economic progress”.

He was outvoted by 9 to 1, however, in a decision that saw the Fed commit to low interest rates for “a considerable time after the asset purchase programme ends”.

The Fed also voted to continue with tapering, cutting the scale of its bond-buying programme from US$35 billion to $25bn.

It said that labour market data was likely to justify lax monetary policy for an extended period of time.

Both of these decisions were widely anticipated.

Continued support for loose policy means that low interest rates in the UAE are likely, but further signs of dissent at the Fed may arise as bond-buying draws to a close.

All changes in US interest rates affect the UAE’s economy. To maintain the value of the dirham against the dollar, the UAE’s central bank must raise interest rates in line with the Fed.

The value of the dollar and the dirham has risen 0.7 per cent against a basket of currencies since Monday.

A slew of positive economic data meant the Fed was likely to proceed with its schedule for tapering. The US announced an annualised growth rate of 4 per cent based on figures from the second quarter and an unemployment rate of 6.1 per cent earlier in July.

“Conditions in the labour market have improved. Rate expectations have fallen sharply. And [a recent US] budget deal should provide some fiscal stability,” said Jessica Hinds, an analyst at Capital Economics, in a recent research paper.

Quantitative easing, in which the Fed buy tens of millions of securities from the private sector to boost banks’ cash reserves and encourage lending, is set to end in October.

Critics of the Fed believe that the Federal Open Market Committee overestimates the amount of spare capacity in the economy, and needs to raise rates sooner.

Larry Fink, the chief executive of BlackRock, the world’s largest asset management firm, which holds $4.6 trillion in assets, called on the Fed to tighten much sooner.

The UAE has benefited from the extended period of monetary easing, which has aided growing consumer demand, a pickup in retail loan growth and significant foreign inflows to the country’s bourses.

The 12-month Emirates Interbank Operating Rate, the rate at which UAE banks borrow and lend from each other, currently sits at 1.06857 per cent – its lowest reading since 2006.

US interest rate rises are likely to increase the Eibor, in turn driving up the cost of financing in the UAE.