UAE and GCC central banks likely to raise rates again in coming week – News

Fed to raise federal funds target rate by 75 basis points after stronger-than-expected inflation data

Borrowing costs in the UAE and other Gulf countries will rise in the coming week as the Federal Reserve is expected to raise interest rates by another 75 basis points.

As the currencies of the UAE and other GCC countries are pegged to the dollar, regional central banks follow the Fed in raising interest rates and vice versa. The United Arab Emirates raised its benchmark interest rate applicable to overnight deposit facilities by 75 basis points in July after the Federal Reserve raised rates.

Capital Economics Middle East and North Africa economist James Swanston said the Fed will raise the federal funds target rate by 75 basis points to 3.25-3.50% at its meeting on Wednesday, following stronger-than-expected inflation data on Tuesday.

“Because of the peg to the U.S. dollar, the central banks of the Gulf countries will follow. The so-called ‘impossible trinity’ means that interest rates in the Gulf region must follow U.S. interest rates due to the commitment to fixed exchange rates and free flow of capital across borders. Going forward, we think the Fed will Tighten policy further by at least 75 basis points by the end of the year, but as we have pointed out before, oil prices, not interest rates, tend to be the main driver of credit growth in the Gulf,” Swanston said.

“We also hold the non-consensus view that the Central Bank of Egypt will resume its tightening cycle,” he added.

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Edward Bell, senior director of market economics at NBD Research in the United Arab Emirates, said a 75 basis point (bps) rate hike at the Fed’s September meeting seemed a no-brainer, and a 75 bps hike is likely at the November meeting, although there will be a 100% increase in interest rates before then. The Fed needs to consider another inflation, employment and GDP data.

“For now, we will maintain our view of the Fed raising rates by 50 basis points in November and December, although risks are overwhelmingly to the upside given how sticky inflation appears to be and the economy is relatively strong. We also expect At least two quarter-point rate hikes in 2023 would bring the federal funds rate to 4.75% by the midpoint of next year, at which point they may pause before considering any easing,” Bell said.

Simon Ballard, chief economist at First Bank Abu Dhabi, said the focus of GCC markets next week will again be firmly on global interest rates.

He added that inflation remains stubbornly high, so central banks will continue to tighten monetary policy into restrictive territory, which in turn will lead to inevitable stagflation — and subsequent recession — conditions in the U.S. and Europe.