UAE raises overnight deposit rate after Fed's quarter-point hike

The UAE Central Bank has raised its Base Rate applicable to the Overnight Deposit Facility by 25 basis points to 3.90%, following the US Federal Reserve’s widely anticipated quarter-point interest rate increase.

The move reflects the UAE’s longstanding approach of aligning key interest rates with US monetary policy because the UAE dirham is pegged to the US dollar. This policy helps support monetary and currency stability.

UAE Rates Move in Step With the US

According to Vijay Valecha, Chief Investment Officer at Century Financial, the Federal Reserve’s decision was largely expected after a pause of more than three years.

“The dirham is pegged to the dollar, so the UAE Central Bank typically moves its Base Rate in step with the Fed,” Valecha said.

The UAE Base Rate, which was previously 3.65%, serves as an anchor for overnight money-market rates. Meanwhile, EIBOR, the interbank benchmark used for many local loans, generally moves closely with the Base Rate.

Borrowing Costs Could Rise

The rate increase is expected to affect borrowing costs across the UAE financial system, particularly for borrowers with variable-rate loans.

Valecha said the move is likely to feed through to variable-rate mortgages and corporate borrowing costs. Higher interest rates could also add pressure on companies that are already dealing with increased energy and shipping expenses.

Impact on Savings and Mortgages

Madhur Kakkar, founder and CEO of Elevate Financial Services, had anticipated the 25-basis-point increase, which takes the UAE Base Rate from 3.65% to 3.90%.

Given the dirham’s peg to the US dollar, Kakkar said the UAE Central Bank was likely to closely follow the Federal Reserve’s move.

He noted that the impact on consumers would likely be gradual, with depositors potentially seeing improved returns on savings and term deposits before borrowers feel the full effect of higher repayment costs.

Mortgage Repayments May Increase

Kakkar estimated that if the full 25-basis-point increase were applied to an outstanding AED 1.5 million mortgage with 25 years remaining, monthly repayments could rise by approximately AED 210, equivalent to around AED 2,500 a year.

The actual impact on individual borrowers will depend on the terms of their mortgage and how their interest rate is structured.

Markets Watch Fed Policy Ahead

With the UAE rate now at 3.90%, analysts said attention will turn to the Federal Reserve’s future policy direction.

Markets will particularly watch whether US policymakers maintain a higher-for-longer interest-rate approach into 2027, which could influence the UAE’s own interest-rate environment given the dirham’s dollar peg.