UAE Central Bank increases interest rate: How will it affect residents?

Consumers will feel the sting of the increase in prices and interest rates soon



by

Muzaffar Rizvi

Published: Thu 5 May 2022, 12:47 PM

Last updated: Thu 5 May 2022, 2:34 PM

In line with the US Federal Reserve's move, the Central Bank of the UAE raised its base rate by 50 basis points to 2.25 per cent effective from Thursday. Twelve major central banks of emerging and developed markets raised interest rates in 2021 and initiated the same practice this year to contain inflation, which surged to multi-decade highs in the US and other major economies of the world.

Here's all you need to know about what effect the hike will have in the Emirates.

How will the UAE Central Bank's move impact consumers?

The interest rate hike will be reflected in equated monthly instalments (EMIs) on home, vehicle and other personal and corporate loans. Consumers will have to pay higher EMIs, as higher rates will make it more expensive to buy a home/car or carry a credit card balance.

How expensive will credit cards get?

Credit card holders, with a good credit history, will pay 18 per cent interest rate on average annually. This will be subject to increases in line with every hike in interest rates.

Will consumers need to pay more?

Consumers will feel the sting of the increase in prices and interest rates soon. Credit card users will eventually pay more on any revolving debt as a higher rate will reflect in their monthly statements within one or two monthly statement cycles.

How many rate hikes are likely to take place?

The US Fed has indicated that it plans to raise rates several times this year. Including the first hike in March, it is likely that the Fed will increase rates a total of five times in 2022 to reach its 1.75 percentage point target this year. The Fed plans to get interest rates back to about two per cent by 2024.

Will the hike benefit consumers in any way?

The interest rate hike indirectly benefits consumers too, as banks will gradually increase profit rates on savings accounts and certificates of deposit.

How do rate hikes contain inflation?

The interest rate increase will temper consumer and business spending that will help contain consumer prices. By curbing demand, prices should increase less quickly.

What is the inflation target?

In most emerging economies, inflation increased to double digits, while in developed countries, it has surged to as high as seven per cent. The US Fed wants inflation to be around two per cent annually — down from the 2021 rate of seven per cent.

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muzaffarrizvi@khaleejtimes.com