As always, the answer depends on which interest rates you are talking about. Most people are more concerned about the interest they are paying on their debts, and generally the biggest debt you will have is your mortgage.
Mortgage interest rates in the UAE are usually set with reference to the three-month Emirates Interbank Offer Rate or EIBOR for short. This has gone up by around one-third percent (0.3%) since the middle of last year, which means that yes, if you have a flexible rate mortgage then your monthly repayments may be higher.
Who decides what the EIBOR is?
The UAE central bank calculates the EIBOR every day. 11 banks who make up the EIBOR panel submit the interest rate at which they are willing to lend money to another bank, and the UAE central bank calculates the average of these (after excluding the highest and lowest submissions) to get the EIBOR ‘fixing’ for that day.
Although the EIBOR can change from day to day, banks will usually only adjust their mortgage rates once a month or even less frequently.
[Related: EIBOR, LIBOR – What does it mean anyway?]
Why have EIBOR rates increased since last year?
Because the UAE dirham is pegged to the US dollar, the UAE’s main interest rates are affected by changes in US interest rates. In December last year, the Federal Reserve increased the Fed Funds rate by a quarter percent which is one of the reasons why the EIBOR has increased.
Because the EIBOR is an interbank rate and not the official policy rate of the UAE central bank, other factors can influence it on a day-to-day basis. If banks don’t have a lot of spare cash to lend to other banks, then they will submit a higher EIBOR. If they have a lot of extra cash on any one day (perhaps because of a large deposit by a customer) then they may submit a lower EIBOR.
The low oil price also put upward pressure on EIBOR, because there is less oil revenue being deposited in banks, and so less spare cash for banks to lend out.
Will EIBOR keep going up from here?
The good news is that oil prices have recovered from the ultra-low levels we saw in January, so this should help with government deposits in the banks. The not-so-good news for borrowers is that the US Federal Reserve will probably increase the Fed Funds rate again this year at least once more, possible even two or even three times, depending on who you ask. When and how much the Fed Funds rate rises will depend for the most part on how quickly the US economy grows, and how quickly inflation accelerates in the USA. If and when US rates do rise again, EIBOR (and mortgage rates linked to EIBOR) will almost certainly go higher as well.
Kate Pennington is a freelance financial journalist. She studied Economics in the UK and subsequently spent several years working as an analyst in London. Kate is fascinated by financial markets and can usually be found reading the FT while drinking bottomless cups of coffee.