Loans may get cheaper as UAE cuts interest rates after Fed

The central banks in Saudi and Bahrain also followed the Fed's decision, cutting their rates by the same margin.

The Central Bank of the UAE on Wednesday said that it was cutting interest rates applied on the issuance of certificates of deposits starting from Thursday, immediately following the US Federal Reserve's decision to cut rates by 25 basis points - the US central bank's first such move since the financial crisis of 2008.

The UAE central bank said in a statement its repo rate for borrowing short-term liquidity had also been cut by 25 bps, effective from Thursday. Lower interest rates, when passed on to the consumer, would mean lower cost of borrowing money, thereby making loans cheaper.

Central banks in Saudi Arabia and Bahrain followed the move, cutting their rates by the same margin. Their currencies are pegged to the US dollar and they follow the Fed on interest rate moves.

The Saudi Arabian Monetary Authority said it had cut its repo rate, used to lend money to banks, to 275 basis points from 300 bps, and the reverse repo, the rate at which commercial banks deposit money with the central bank, by the same margin to 225 bps.

The Central bank of Bahrain decided to cut its one-week deposit facility to 2.50 percent from 2.75 percent. It also reduced the overnight deposit rate to 2.25 percent from 2.5 percent, and the lending rate to 4.25 percent from 4.5 percent.

The Fed cut interest rates, citing concerns about the global economy and muted US inflation, and signaled a readiness to lower borrowing costs further if needed.

Financial markets had widely expected the quarter-percentage-point rate cut, which lowered the US central bank's benchmark overnight lending rate to a target range of 2 percent to 2.25 percent.

In a statement at the end of its latest two-day policy meeting, the Fed said it had decided to cut rates "in light of the implications of global developments for the economic outlook as well as muted inflation pressures".

The Fed said it will "continue to monitor" how incoming information will affect the economy, adding that it "will act as appropriate to sustain" a record-long US economic expansion.

The decision drew dissents from Boston Fed President Eric Rosengren and Kansas City Fed President Esther George who argued for leaving rates unchanged. On the opposite flank, US President Donald Trump is likely to be disappointed the Fed did not deliver the large rate cut he had demanded. Trump has repeatedly harangued the central bank and Fed chairman Jerome Powell for not doing enough to help his administration's efforts to boost economic growth.

Markets react

The US dollar index jumped by 0.22 percent to 98.264 after the Fed's decision. Against the euro, the dollar was 0.4 percent stronger, last at $1.111, its strongest level since May 2017.

Wall Street wobbled slightly after the announcement. As at press time, the S&P 500 and Dow Jones were flat, while the Nasdaq inched up 0.1 percent.