The UAE Central Bank kept its benchmark interest rate steady, following the US Federal Reserve’s move to maintain its policy rate for the third consecutive time this year amid a slowing economy and a gradual drop in core inflation.
The US central bank left the federal funds rate between 5.25 per cent and 5.5 per cent at the end of its two-day meeting on Wednesday.
The rate is at its highest level since 2001, as the Fed tries to bring inflation down to its target range of 2 per cent.
Consumer prices in the world’s biggest economy soared to a four-decade high in June last year.
While inflation in the US in November increased 3.1 per cent from 12 months earlier, it has decelerated from its four-decade peak of 9.1 per cent in June 2022.
The rising worker pay, an important driver of inflation that is a main concern of the US central bank has also extended its slow decline last month with wages rising at a 4 per cent annual rate, according to data from the Bureau of Labour Statistics.
The wage rise, although slowing is still above the 3 per cent level policymakers view as consistent with their 2 per cent inflation target.
The Fed had kept the rates steady at its last two meetings but is widely expected to cut the benchmark rate in the first half of 2024 on growing optimism that inflation will fall further.
Markets had recently been pricing in a rate cut by the Fed as soon as March next year, but traders pared those bets and are now targeting May for the first rate cut after the central bank began its rate-increase cycle in March 2022.
Most central banks in the GCC follow the Fed's policy rate moves due to their currencies being pegged to the US dollar, with Kuwait the only exception in the six-member economic bloc as its dinar is linked to a basket of currencies.
The UAE Central Bank maintained its base rate for the overnight deposit facility at 5.4 per cent, effective from Thursday.
It also maintained the rate applicable to borrowing short-term liquidity from the regulator through all standing credit facilities at 50 bps above the base rate, the regulator said on Wednesday.
The base rate, which is anchored to the Fed's interest on reserve balances (IORB), signals the general stance of the Central Bank's monetary policy and provides an effective interest rate floor for overnight money market rates.
Despite higher interest rates, the UAE economy has maintained a robust growth momentum, after expanding 7.9 per cent in 2022, its biggest rise in about 11 years.
The UAE economy expanded by 3.7 per cent annually in the first half of the year, driven by strong non-oil sector growth as the country continues to pursue its diversification goals, Minister of Economy Abdulla bin Touq said in October.
While the first-half rate of economic growth “may seem modest” compared with last year, it is still “robust growth against the backdrop of global and regional uncertainty”, Mr bin Touq said.
The UAE’s economy is expected to expand by 3 per cent this year and 4 per cent next year, driven by strong growth in its non-oil sector, S&P said in a September report.
Key contributors to the country's economic growth next year will include the wholesale trade, industry, real estate, construction, financial services and tourism sectors, as well as oil and gas, it said.
Business activity in the UAE's non-oil private sector economy continued to strengthen in November, driven by a marked improvement in demand as new orders inventories rose sharply.
The seasonally adjusted S&P Global purchasing managers’ index – a key gauge of the nation’s non-oil economy – hit 57 in November, slightly lower than the four-year high of 57.7 it reached in October, but well above the neutral level of 50 mark that separates growth from contraction.
