Those who have been following the news recently might know that the UAE Central Bank has raised its repo rate (the rate at which it lends to commercial banks) by 25 basis points after a similar hike by the US Federal Reserve. The development is important for all as a rise in interest rates impacts bank customers in the UAE, albeit in different ways. Broadly speaking, life will get a bit dearer for those looking to borrow money, while depositors will earn slightly higher rewards.
However, in order to fully explain how rising interest rates will impact your life, we need to delve deeper into the subject.
First Things First, Why Was The Interest Rate Hiked?
Some of you are perhaps aware that most Central Banks in the Middle East region, including the one in UAE, peg their currencies to the US dollar. This means that local benchmark lending rates are expected to mimic those set by the US Fed. So, when the US central bank recently raised its lending rates by 25 basis points, i.e. from 2 percent to 2.25 percent, the CBUAE predictably mirrored the move and announced a hike in its key policy rate.
Now, time to address the most important question – how does the hike affect you? The impact of higher interest rates mainly depends on your financial decisions – it won’t have much of an impact if you have any existing loans; it can pinch a little if you are looking to take out any new ones; and may turn out to be beneficial if you have a good chunk of investments stored in a bank. Let us explain each in detail:
What Does It Mean If You Are A Borrower?
If you have already taken out a loan for an asset, such as your car, then relax, as the hike in rates won’t have any effect on the interest you will pay. However, any new borrowings will now cost you more money as the banks will start implementing the new rates soon.
Quick tip: Were you planning to buy an asset in the near future? Don’t waste time taking a decision as banks may not have applied the new rates yet. Starting your loan process sooner could help you avail cheaper interest.
Mortgages always take a hit whenever there is a rise in interest rates, so be prepared to shell out more money on your property loan. However, the impact will also vary on the type of mortgage you have. For instance, those with a fixed-rate mortgage will remain cushioned until their predefined period of fixed interest ends.
Credit card holders
The hike won’t have a major impact on you as the interest rates levied on credit cards are significantly higher in the UAE when compared to the rest of the world. Furthermore, most banks are expected to keep their credit card rates unchanged, which means you won’t have to pay additional money as interest. If your bank does adjust the rates, it will communicate the changes to you well in advance.
What Does It Mean If You Are A Saver?
A hike in interest rates can be good for those looking to store money as the banks are expected to pay higher rates on saving accounts. Higher rates are particularly good for customers with large sums of cash in variable-interest savings accounts as they will get a fairly good return on their money According to Ambareen Musa, the Founder and Chief Executive of souqalmal.com, in addition to a substantial rise in returns on savings accounts, it will also provide a hedge against inflation and will offset a potential erosion of value that arises when the money is stashed in current accounts.
With the hike in rates set to continue on its upward trajectory this year and the next, analysts urge UAE residents to brace themselves from the pitfalls and cash in on the potential opportunities it presents.