Borrowers Await US Fed Decision Amid Expectations of a Possible Interest Rate Hike in December.
Dubai: UAE residents anticipating an interest rate cut today may have to wait longer, as three market analysts predict that the US Federal Reserve will maintain its current rates while leaving the door open for another increase in December.
The Federal Reserve’s two-day policy meeting concludes on Wednesday, October 28. Its decision is particularly important for UAE borrowers and savers because the dirham is pegged to the US dollar, and the UAE Central Bank’s base rate is linked to the Fed’s interest rate on reserve balances.
If the Fed keeps rates unchanged, the UAE Central Bank is also likely to maintain its benchmark rate, although it will announce its decision separately. The UAE’s base rate currently stands at 3.9%, following a 25-basis-point increase in September.
For UAE residents, this outlook suggests that borrowing costs are unlikely to ease immediately. Market attention is now shifting towards whether the Fed will signal another potential rate increase before the end of the year.
Why an Interest Rate Cut Appears Unlikely
Josh Gilbert, eToro’s lead analyst for APAC and the Middle East, expects the Federal Reserve to hold rates steady while maintaining a cautious stance on inflation.
“The Fed looks set to sit on its hands this week, but it’s likely to come with a hawkish tone, with markets pricing in close to an 80% chance of another hike in December,” Gilbert said.
A hawkish stance indicates that policymakers remain concerned about inflation and may prefer to keep interest rates elevated or raise them further.
According to Gilbert, slowing wage growth and weaker hiring have provided the Fed with some flexibility. However, persistent inflation and elevated oil prices could prevent policymakers from adopting a more relaxed approach.
Vijay Valecha, chief investment officer at Century Financial, shares a similar outlook, expecting the Fed to maintain its target interest rate range of 3.75% to 4%.
“The economy continues to expand, but signs of cooling in the labour market support a cautious, wait-and-see approach,” Valecha said.
His assessment highlights the competing economic pressures facing policymakers. While rising energy prices and persistent underlying inflation support keeping monetary policy restrictive, slower employment growth gives the Fed a reason to delay further rate increases.
For UAE borrowers, the upcoming decision could therefore mean continued pressure on financing costs, with the possibility of further increases if the Federal Reserve adopts a more aggressive policy stance in December.
Interest Rates May Stay Unchanged, but the Fed’s Message Could Shift Expectations
Keeping interest rates unchanged does not necessarily signal better conditions for borrowers. The US Federal Reserve could maintain its current rates while indicating that another increase remains possible in the coming months.
Daniela Hathorn, senior market analyst at Capital.com, said investors would be paying close attention to signals from major central banks.
“All three are expected to hold rates steady, making forward guidance the key trigger for volatility,” Hathorn said, referring to the Federal Reserve, European Central Bank and Bank of Japan meetings scheduled this week.
Forward guidance refers to central banks’ communication about their future monetary policy decisions. According to Hathorn, Gulf financial markets will closely monitor the Fed’s statements because most currencies in the region are pegged to the US dollar.
Vijay Valecha, chief investment officer at Century Financial, believes the voting pattern among Fed policymakers could provide additional clues. Any disagreement favouring an immediate rate increase could indicate growing concerns about persistent inflation.
“The real signal will come from the dissent count and Warsh’s press-conference tone,” Valecha said, referring to Federal Reserve Chair Kevin Warsh.
Key Interest Rate Developments UAE Residents Should Monitor
The prevailing expectation is that interest rates will remain unchanged rather than decline. If the UAE Central Bank follows the Federal Reserve’s decision, the country’s benchmark rate could remain at its current level.
However, the UAE benchmark is an overnight policy rate and does not directly represent the interest rates charged on mortgages, personal loans or credit cards. According to the UAE Central Bank, it serves as a floor for overnight money market rates.
The main concern for borrowers is whether another rate increase could arrive before the end of the year.
Josh Gilbert, eToro’s lead analyst for APAC and the Middle East, considers a December rate hike the most likely outcome unless Warsh explicitly challenges market expectations.
Valecha also anticipates a 25-basis-point increase in December, although he believes the decision will largely depend on upcoming inflation data.
“The October inflation print will be decisive: another broad-based upside surprise would all but lock in December, while softer readings would hand Warsh the cover to wait,” Valecha explained.
For UAE residents hoping for lower borrowing costs, the latest central bank decision may offer little immediate relief. While rates could remain steady for now, the Fed’s accompanying statements and future inflation figures will play a crucial role in determining whether borrowing costs remain stable or rise again before year-end.
