The UAE residents will have to shell out more for their mortgage, credit cards and personal and auto loans next year as interest rates will be hiked further by the US and the UAE central banks, say economists.

The US Federal Reserve raised its benchmark interest rate seven times this year, the highest in 15 years, from 0-0.25 per cent to 4.25-4.50 per cent in order to rein in inflation which climbed to 9.1 per cent this summer.

Since the UAE dirham is pegged to the dollar, the Central Bank of UAE also raised its Base Rate applicable to the Overnight Deposit Facility (ODF) from 1.5 per cent to 4.4 per cent in 2022.

Vijay Valecha, chief investment officer, Century Financial, expects Fed to hike interest rates to as high as 5.1 per cent in 2023 before it ends its fight against runaway inflation.

“This would take the benchmark interest rate to the target range of 5.0-5.25 per cent. In fact, according to the dot plot, seven of the 19 committee members saw rates rising above 5.25 per cent next year. Tracking the increase in the US federal Fund rate, the UAE base rate for Overnight Deposit Facility (ODF) will also likely increase by 65-75bps to 5.0 per cent in 2023, since the dirham is pegged to the dollar,” said Valecha.

Naeem Aslam, chief market analyst, AvaTrade, said, the biggest worry for investors is how far the Fed will go with its interest rate. “From their tone, it is very much clear that the Fed isn’t afraid of continuing its process of hiking interest rates and recession remains the least concern for them as they want to bring inflation lower at any cost.”

Daniel Richards, Mena economist at Emirates NBD Research, said the market remains more dovish on the rating outlook, with traders pricing in a peak Fed Funds rate of 5.0 per cent in H1 2023 followed by two rate cuts in H2 taking the benchmark back to 4.5 per cent by the end of next year.

Fixed or variable rates for UAE residents?

Vijay Valecha noted that the UAE residents that have taken variable rates over fixed rates will be affected by the rate hikes.

“In early 2022, the UAE’s 3-month Eibor rate was 0.5 per cent whereas today it is above 4 per cent. The difference of 3.5 per cent will be felt across all types of variable loans including personal, auto, and home loans,” Century Financial’s chief investment officer said

For borrowers on fixed-rate home loans, there should be no changes to their mortgage payments until they come to the end of their fixed-rate period. However, borrowers on variable-rate mortgages will feel the change as soon as their next monthly payment is due.

“Going forward, the mortgage rates of new loans will certainly go up by 75 basis points at least if the Fed sticks to the median forecast projections.”

He said once the UAE Central Bank has hiked the interest rates, changes to credit card interest rates typically follow, usually within a billing cycle or two.

“The interest rate on credit cards in the UAE is already very high and ranges between 2.5-3 per cent monthly, which is equivalent to 30-36 per cent annually, and when the Central bank increases its rate by 50 basis points, your bank would likely raise your APR to 30.5-36.5 per cent,” added Valecha.

Fixed loans for property buyers?

With many economists forecasting a recession in 2023, the Fed might pivot in the latter half of next year. Therefore, Valecha suggested that people looking to buy a property may want to consider choosing fixed loans for the next year to maintain a stable monthly payment.

“Thereafter, they should retain the option for the floating rate to kick in or they must have the ability to refinance their mortgage loan to benefit from the environment of reduced interest rates later on,” he said.

Refinancing options

With rising interest rates, UAE banks have been offering refinancing options to ease monthly payments.

“So, businesses planning to refinance their debt now will be better off opting for a floating-rate loan since rates are expected to decline in the medium term. However, for short-term loans, floating loans will result in more monthly interest payments since it will take a while to shift to a low-interest rate environment, and hence fixed-rate loans will make more sense.”

“With credit card debt likely to get expensive, one can consider paying down their debt as much as possible or take out a personal loan at a lower interest rate to reduce your monthly pay-outs,” he added.

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