Borrowing to become more expensive as interest rates head north

Be it personal, auto or home loans, borrowing will become expensive as interest rates are likely to go up in the UAE this year in line with the expected Fed rate hikes, analysts have said.

Interest rates in the UAE, which are aligned with the US Federal Reserve, are projected to increase three times this year. Hence the cost of borrowing will also increase in the emirates.

Majority of the Federal Open Markets Committee (FOMC) participants have projected 3 or more interest rate hikes in 2018 that would see the rates move to a range of 2 per cent to 2.25 per cent from the current range of 1.25 per cent to 1.5 per cent, implying a change of 75 basis points (bps).

"We could see the anticipated hikes in any of the 8 tentatively arranged FOMC meeting in 2018. In 2017, we saw interest rate hikes in March, June and December," says MR Raghu, managing director of Marmore Mena Intelligence.

The UAE repo rates saw a cumulative increase of 75bps in 2017, which saw the rates increase from 1 per cent to 1.75 per cent. The current UAE repo rate of 1.75 per cent is expected to move up to 2.50 per cent in 2018 if the UAE Central Bank decides to follow the Fed decision to hike the rate thrice by 25bps on each occasion, adds Raghu.

Rajiv Kumar, deputy CEO, Phillip Capital, expects three rate hikes in 2018, with 25bps each.

"However, we won't be surprised if the Fed revisit this plan as rising oil and commodity prices may affect the inflation, which is currently well under their target levels. One of the factors of rising price is geo-political situation. If situation within the region escalates, Brent is widely expected to surpass $80 per barrel. Markets wouldn't cheer this and inflation will be the focal point again. In short, crude and commodity prices could be the deciding factors if Fed change the plans."

Kumar says Fed is unlikely to increase beyond 0.25 per cent per leg in 2018 because low unemployment and inflation open path for gradual increase in rate.

The benchmark interest rate in the UAE was last recorded at 2 per cent. Interest rate in the UAE averaged 1.31 per cent from 2007 until 2017, reaching an all time high of 4.75 per cent in November of 2007 and a record low of 1 percent in January of 2009.

He noted that the UAE banks maintain good balance sheet and improved liquidity growth positions them well to increase the rates in tandem with US policy. The rate hike for property loans may not move up in tandem though with other segments in order to support end-users in the real estate sector which has witnessed a slowdown in the past several quarters.

The amount of personal loans - disbursed for business and consumption purposes - has seen a decline in Q2 and Q3 of 2017 post the hike in interest rates. Personal loan amounts have come down by 5.19 per cent quarter-on-quarter basis in Q3 2017 when compared to Q2 2017.

Rate hike to continue

Raghu predicts that as per FOMC participant projections, interest rates are expected to go up not only in 2018 but also further into 2019 and 2020.

"Although some GCC countries have been resilient at certain occasions by maintaining their policy rates to foster economic growth, we expect them to more or less follow the trajectory set by the Fed and increase their policy rates in the upcoming years. Therefore, it would be advisable not to postpone any plans of borrowing, in case companies or individuals foresee a need to borrow in the next one or two years," Raghu advised.

Kumar said rate rise may affect all borrowings - credit card/personal loan, car loan, housing loan and mortgages.

He advised residents to take advantage of a reduced interest rate. With dirham pegged to dollar, there is a good likelihood of interest rate to go higher from the current levels in the next couple of quarters.

"Interest rate in UAE is expected to be around 2.25 per cent by the end of this quarter. Looking forward, estimated rate stands at around 2.50 to 2.75 per cent in 12 to 15 months time.

"In the long-term, rate may even go further. Apparently, rates are not declining anytime soon and borrowing is going to be expensive in short to medium term. As far as mortgage loans, its better to go for fixed rate loans than for the loans with floating rates. However, low interest rates should not be the only parameter for borrowing. Borrowing money increases liability on one's budget and therefore, should be well planned," advised Kumar.