The spectre of rising interest rates in the United States may be a double whammy for the economy of the UAE, which is already experiencing the fallout from lower oil costs.
The UAE dirham is pegged to the United States dollar and the Abu Dhabi-based Reserve bank follows the US Federal Reserve #x 2019; s monetary policy. However while the world #x 2019; s largest economy is on the mend, economic growth in the Emirates is starting to slow, making increasing rates of interest less than ideal, observers say.
#x 201c; It will be a hindrance, #x 201d; stated Alp Eke, a senior economist at National Bank of Abu Dhabi, the UAE #x 2019; s most significant bank by possessions. #x 201c; With the [currency] peg regime, you have to follow their financial policy and we needhave to grow. We requirehave to in fact motivate financial investments, to have more cash. It #x 2019; s a contradictory policy. #x 201d;
The majority of experts keep, however, that rate of interest would need to increase noticeably and oil prices would needhave to remain subdued for some time to make a considerable impactinfluence on the UAE #x 2019; s economy.
The minutes of the US Federal Reserve #x 2019; s fulfilling last month released on Wednesday suggest that the Fed may raise rates next month after years of keeping rate of interest near no. Nevertheless, market expectations are for a steady boost.
#x 201c; Clearly rate of interest have actually been incredibly low for a long periodan extended period of time, so I put on #x 2019; t think the boost, when it takes place, is going to be a surprise, #x 201d; stated Marc Adam, chief monetary officer of the Dubai-based Commercial Bank International.
#x 201c; In fact, I believe it would be more of a surprise if it didn #x 2019; t take place. And givenconsidered that it #x 2019; s expected, I wear #x 2019; t think there will be a significant effect to the UAE economy or honestly the banking sector in the briefshort-term a minimum of. #x 201d;
Mubarak Al Mansouri, the guv of the Central Bank, said today that he expected the UAE #x 2019; s economic development to slow to 3 per cent this year from 4 per cent last year as the downturn in oil costs affects the federal government #x 2019; s ability to invest on infrastructure.
The federal government funds more than 60 percent of its budget plan from the sale of unrefined oil, a commodity which has actually lost majority of its worth over the past year amidst a supply glut and slowing demand from China.Mr Al Mansouri
stated that rates of interest on deposits would rise if the Fed began increasing rates. Nevertheless, he said that UAE banks were already raising interest rates in anticipation of that.
#x 201c; I believe rates are already in the system, #x 201d; said Mr Al Mansouri. #x 201c; They have currently increased. It #x 2019; s not due to the fact that of liquidity. It #x 2019; s since of expectations that the Fed will increase rates. #x 201d;
Bank experts agree, including that a 0.25 percent rate rise, which many observers reckon the Fed might begin with, would be easily absorbed by loan providers. More aggressive rate increases of more than 1 per cent would put pressure on debtors at a time when economic growth is slowing.
#x 201c; If the economy is robust, then the market will have the ability to absorb the higher rates more comfortably, #x 201d; stated Shabbir Malik, a Dubai-based banking analyst at EFG-Hermes, an Egyptian investment bank. #x 201c; If the economy remains sluggish, then it would create credit-quality problems. The UAE would probably choose higher interest rates when the economy is in a better shape and oil rates have actually started to recover. #x 201d;
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