Zawya - How Fed rate hike will impact UAE consumers’ savings, mortgages, credit cards

The US Federal Reserve’s decision to hike interest rates will add financial burden to consumers in the UAE who are already battling with rising cost of living, experts told Zawya.

Those who are likely to feel the most impact of the rate hike, which marks the fourth consecutive 75-basis point increase to the fund rate, are credit card users and bank borrowers, including those with existing or have plans to take new mortgages this year.

Most central banks in the Gulf region announced on Wednesday they would adjust their rates following the Fed’s decision to raise the interest on reserve balances by 75 basis points. In the UAE, the central bank said it would increase the base rate applicable to the overnight deposit facility by 75 basis points – from 3.15% to 3.9% - effective November 3.

“The latest interest rate hike… could have an important impact on the cost of financing for end users, be they individuals or companies. Banks habitually pass on increases in interest rates to their customers, thereby raising the cost of new mortgages and loans, as well as of existing loans with no fixed interest rate,” said Fadi Reyad, Chief Market Analyst at fintech broker Capex.com MENA.

“This puts consumers in a difficult position as they become trapped between higher financing costs and higher prices, as inflation continues to erode purchasing power,” Reyad told Zawya.

Soaring inflation, which has reached a 40-year high in the US, has prompted the Fed to keep its hawkish stance. The Fed has now implemented a total of six rate increases in a row to tame inflation.

Cost of living in Dubai has been on the rise, with consumer inflation climbing 4.6% last April, the highest since May 2015, according to Emirates NBD. Inflation has been driven by higher transport costs, which went up nearly 30% year-on-year.

Impact on credit card

Consumers who depend on credit cards for daily purchases can expect to spend more on interest rate for unpaid balances. Credit card interest rates in the country are already more costly than last year, with monthly rates going up from 2.5%-3% at the beginning of the year to 3.25%-5% currently.

“The Fed’s objective for the interest rate hike is to slow down spending and tame inflation. As a result, these adjustments have, in turn, jolted credit card interest rates in the US and the same should be expected here in the UAE, making it more costly for credit cardholders,” said Peter Maerevoet, Global CFO and Regional CEO for Asia at Tradewind, a finance company.

Most credit cards have variable interest rates. These are linked to a prime rate that tends to fluctuate on the central bank interest rate, explains Arun Leslie John, John, Chief Market Analyst at Century Financial.

Mortgages

As for those who have existing mortgages or are still planning to get one, higher interest rates could make repayments more costly.

Borrowers who have mortgages with fixed interest rates are protected from any rate fluctuations generally for a period of five years. The rates tend to be variable after the five-year period.

“The mortgage rates for new loans will certainly go up by 75 basis points at least,” John said.

However, there could be a silver lining for new borrowers in the upcoming year. Economists have forecast an economic recession in 2023 and this could slow down Fed rate increases in the second half of 2023.

“So, new applicants for a mortgage loan will be better off opting for a floating-rate loan, since rates are expected to decline in the medium term. The current 10-year US treasury yields are near 15-year highs,” John said.

US dollar

What could work in favour of consumers in the UAE, particularly those who regularly send money home, is that their dirham will likely have higher purchasing power.

“Rising interest rates in the US generally boost the dollar, which could increase the remittance from UAE since the dirham is pegged to the greenback. As a result, many might opt to take advantage of attractive exchange rates,” John said.

“With many economists forecasting a recession in 2023, the Fed might pivot in the second half of next year. So, new applicants for a mortgage loan will be better off opting for a floating-rate loan since rates are expected to decline in the medium term.”

Bank accounts

Interest earned on bank accounts could move higher following the Fed rate bump, but the adjustment might not go up as much as the borrowing rates. If there are adjustments, consumers with regular savings accounts, money market accounts and certificates of deposit are the ones who are likely to benefit.

But a huge bump is not likely to happen for savers.

“Saving bank deposits might not go up much, as banks don’t increase those rates by a proportionate amount, since that will impact their net interest margins. Nevertheless, we could see a 25-basis-point hike across all the banks,” John said.

Markets

The Dubai stock market was volatile to a certain extent today as traders considered the possible next steps for US monetary policy. Uncertainty could plague the market before new data comes in.

According to Farah Mourad, Senior Market Analyst of XTB MENA, the Abu Dhabi stock market was trading sideways today as traders contemplated securing their gains after successive gains while the rise in oil prices supported prices. The main index remains exposed to price corrections otherwise.