Pay more on card payments in UAE as interest rates rise

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Pay more on card payments in UAE as interest rates rise

It is expected that monthly payments on credit cards, adjustable-rate mortgages and home equity lines may go upwards

By Staff Report
 


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Published: Thu 14 Dec 2017, 7:56 AM

Last updated: Mon 18 Dec 2017, 10:43 AM

The Central Bank of the UAE on Thursday said it will raise interest rates by 25 basis points in line with the US Federal Reserve board's decision to increase the policy rate third time this year.
The increase in interest rate will be applied to the issuance of its certificates of deposits with effect from Thursday due to the hike in interest rates on US dollar. In a statement, the central said the repo rate applicable to borrowing short-term liquidity from the central bank against certificates of deposits has also been increased by 25 basis points to 1.75 per cent.
Certificates of deposit, which the central bank issues to banks operating in the country, are the monetary policy instrument through which changes in interest rates are transmitted to the UAE banking system.
The Federal Reserve on Wednesday lifted its benchmark short-term rate by a quarter percentage point to a range of 1.25 per cent to 1.5 per cent as the policymakers projected a short-term jump in US economic growth from the Trump administration's proposed tax cuts. It is expected that monthly payments on credit cards, adjustable-rate mortgages and home equity lines may go upward and sustains the trend as the US Federal Reserve maintained its forecast for three hikes next year.
The Fed has raised its key rates five times since the recovery from the Great Recession began in 2009.
Jitendra Gianchandani, chairman and managing partner at Jitendra Consulting Group, said it's simple rule of statistics, correlation and dependence, as the UAE dirham is pegged to the US dollar.
"Any change upwards in the interest by the US, it will also swing the interest rates upwards in the UAE, making all borrowings be it education, housing, car loans or business loans more expensive that will affect the consumers and economy as well," Gianchandani told Khaleej Times.
Atik Munshi, senior partner at Crowe Horwath UAE, said the increase by the UAE central bank expected as the dirham is pegged to the dollar.
"This will entail a higher cost of borrowing whether you are corporate or an individual. The cost of bank financing will increase to this extent and so will be the cost of house mortgages and credit card outstanding interest. The effect, though will only be marginal and might have a little impact on inflation," Munshi told Khaleej Times.
He said commercial banks normally pass on this hike to the customers. "Some SME who heavily rely on bank funding will have a greater brunt as their cost of operations will increase. There is possibility of increase in savings as the depositor gets a better return," he said.
Along with the UAE, Saudi Arabia, Qatar and Bahrain all raised their key benchmark interest rates by 25 basis points after the move by the Fed late on Wednesday.
The Saudi central bank said it was raising one of its benchmark rates to 1.5 per cent although that was counterbalanced by a government announcement of $19.2 billion in stimulus funds for the private sector. Bahrain raised its key rate to 1.75 per cent and Qatar raised its to 2.5 per cent.
Only Kuwait, whose dinar is pegged to a broader basket of currencies, held out. The Kuwaiti central bank kept its main discount rate at 2.75 per cent. There was no immediate word from Oman.
In regional markets, the Dubai index dropped 1.4 per cent, while Abu Dhabi slipped one per cent. Kuwait's index outperformed the region, surging 1.5 per cent.
Global stock markets, meanwhile, fell. Germany's DAX declined 0.7 per cent, while France's CAC-40 dipped 0.3 per cent. Britain's FTSE 100 shed 0.2 per cent.
With inputs from agencies
- muzaffarrizvi@khaleejtimes.com


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