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Abu Dhabi, UAEWednesday 12 December 2018

UAE likely to follow Fed in hiking interest rates this year

Rate hikes may impact borrowing, which will be offset by stronger GDP

Mubarak Al Mansoori, governor of the UAE Central Bank, said the country is likely to follow any US interest rate hikes this year. Antonie Robertson/The National
Mubarak Al Mansoori, governor of the UAE Central Bank, said the country is likely to follow any US interest rate hikes this year. Antonie Robertson/The National

Potential moves by the UAE Central Bank to be in sync with multiple US Federal Reserve interest rate hikes expected in 2018 may impact the cost of borrowing, which the regulator's governor hopes will be offset by an overall boost to the country’s economy.

“The UAE follows a fixed currency regime, which is fixed to the [US] dollar so we have to match,” Mubarak Al Mansoori told reporters at a media briefing in Abu Dhabi on Tuesday. . “With regards to impact on the economy, there will be an impact, however, if you look at the expected [economic] growth rate, I’m hoping this will compensate for such an increase.”

The non-oil economy of the UAE grew at 2.9 per cent last year and is expected to expand by as much as 3.6 per cent in 2018, he added.

Central banks, led by US Fed, slashed the interest rates to near zero in 2009 to stave off the financial crisis but with the pace of economic growth picking up, US and European policy makers are tightening their monetary policies. There have been moderate increases in the US policy rates since December 2015 and at range of 1.25 to 1.5 per cent, it is still low in historic perspective. The UAE, whose currency is pegged to the green-back has followed the Fed moves so far.

In response to rising inflation, the US central bank is now considering hiking interest rates at a much faster rate with analysts expecting potentially three increases this year. This, however, doesn’t have any bearing on the UAE’s fixed currency regime, the governor noted.

“I want to stress that this currency regime has helped UAE for so many years and there is no change in terms of our view on that as a policy,” Mr Al Mansoori said on the sidelines of the Global Financial Markets Forum.

In terms of a rise in the cost of borrowing in the UAE, individuals and entities with lower credit risk will “hopefully” get better borrowing rates based on their Etihad Credit Bureau profile assessments, he said. “This [credit bureau] helps banks give more realistic rates to those who have lower risk profiles.”

The UAE banking system has ample liquidity, despite maintaining the capital adequacy ratio of 18 per cent, 6 per cent higher than what is required under Basel rules, Mr Al Mansoori told Bloomberg . There’s no requirement from the banks to lower reserve ratios and the eight-month long diplomatic disagreement with Qatar has not affected the UAE banking system, he added.

“If anything, we’re getting more deposits into the system,” he told the news service.