Dubai: The US Federal reserve has gone in for a 0.75 per cent hike - and not the 0.50 per cent increase that was widely expected - in aggressive efforts to tamp down inflation. For the US, this is the biggest such increase since 1994. The Fed will go in for another rate increase next month - most likely by the same level - as bringing inflation down becomes the overriding priority.
The UAE central bank has matched the increase, with the new rates becoming efefctive from tomorrow (June 16), and this will add to the cost of loans for individuals and businesses. From a consumer and business perspective, it would require some deft handling to balance the cost of raising funds on one side and countering the headwinds of inflation on the other.
For UAE consumers, this will mean higher interest rate payouts on their loans and mortgages, especially for those who are doing so on a floating rate basis.
Quick check on mortgage costs
Currently, mortgage rates in the UAE are typically fixed for the first two years (depending on the bank) at 3.99-4.25 per cent. Thereafter, they switch to a floating rate of Eibor (Emirates Interbank Offered Rate) plus a few percentage points.
The median rate ahead of the hike was at over 5 per cent. That's heading higher from tomorrow with the UAE Central Bank raising its base rate to match the Fed's.
Watch out for FX action
Currencies will likely see some heavy action in the hours ahead, while Asian markets will offer the first whiff of how investors have taken the US Fed action.
Gold and oil
Gold prices shot up in the immediate aftermath of the announcement, now at $1,838 an ounce after spending nearly the whole of today in the $1,820 range. In the oil markets, Brent crude is down by over $3 to $117.8 a barrel.
Gold’s sudden rush would have come as a blow to UAE shoppers and jewellery retailers, who were expecting the exact opposite after the Fed decision. Now, they will have to wait to see whether the current gains will hold. Typically, dollar’s strength means a softer gold price.
How are the markets doing?
The US S&P 500 index is up 1.78 per cent, having started the day in positive territory and investors more or less factoring in the 0.75 per cent hike. When the Fed did make the announcement, the gains were extended. Will it mean a smart reversal or will the ‘bear’ spell continue awhile? Or will Asian markets opening Thursday provide a better barometer?Source: