Falling interbank rates are expected to lead to lower lending costs for firms and consumers.
Lower interbank borrowing rates expected to spur UAE credit growth
Businesses and individuals are expected to be able to borrow money more cheaply as lenders gradually filter through the benefit of lower interbank rates.
A softening of rates is expected to help spur credit growth after two years in which lending has drained to a trickle.
Economists say higher borrowing is important to help grease the wheels of the economy.
"A drop in rates could and should translate into improved lending appetite and that will be manifested in lower costs or a relaxation in risk parameters," said Rahul Shah, banking analyst, of Deutsche Bank in Dubai.
The three month Emirates Interbank Offered Rate (Eibor) has dropped 2.6 per cent so far this month to 2.075 per cent, its lowest level this year, Central Bank data shows. The sharp dip follows little movement in the following three months of the year. Eibor has slowly declined from a peak of 4.8 per cent in October 2008.
Analysts are attributing the fall to the steady replenishment of liquidity into the financial system as the economy improves. As banks become more flush with cash deposits, the interest rates they charge each other to secure loans - known as Eibor - has started to drop.
Business customers are likely to be the first to see the benefit of falling Eibor as many corporate loans including working capital products use it as a benchmark for pricing.
For retail consumers, the benefit of falling Eibor may take longer to feed through the system. Credit cards and other retail products are often priced on bank's own benchmarks, say analysts.
"Indirectly if the cost of funding falls conditions will be that retail rates will fall as well and that would increase retail lending," said John Tofarides, a Moody's analyst.
Eibor's move downwards comes as other signs emerge of improving lending conditions.
During the past two years the cost of securing finance crept up as during the global financial crisis banks became more risk averse about who borrowed from them.
That situation may be starting to reverse now.