Not in an unexpected move, the Central Bank of the UAE (CBUAE) announced that it will raise interest rates applied to the issuance of its Certificates of Deposits in line with the increase in interest rates on US Dollar from Thursday, 14 June 2018.
The interest rate hike comes as the US Federal Reserve Board decided to increase the Federal Funds Rate by 25 basis points in a recently concluded meeting. Following the hike, many central banks around the world -which include the UAE- have increased their rates in tandem.
The Repo Rate, which is the rate at which government lends to banks against Certificates of Deposits, has also increased by 25 basis points to 2.25%.
Certificates of Deposit, which CBUAE issues to banks operating in the country, are the monetary policy instrument through which changes in interest rates are transmitted to the UAE banking system.
This increase in the rates on Certificates of Deposits would most likely trickle down and commercial banks in the country would most likely increase rates on their deposits as well as on the loans that they give out. While the increase in interest rates may have a positive impact on the banks’ profits, it will make loans to businesses as well as individuals and mortgages more expensive.
Increases in interest rates normally reduces inflation but it does have a negative impact on consumption and investment because consumers and investors are reluctant to borrow at higher interest rates.
Increased interest rates can also cause property prices to soften further as mortgages become more expensive.