The Central Bank of UAE raises base rate by 5 basis points following Fed move

The Central Bank of the UAE (CBUAE) raised its base rate applicable to the Overnight Deposit Facility (ODF), replicating the US Federal Reserve's move on Wednesday.

The banking regulator increased the ODF rate by 5 basis points to 15 bps, it said in a statement.

The decision to raise the rate, which becomes effective on Thursday, was taken following the US Fed board’s decision to increase the Interest on Excess Reserves (IOER) by 5 bps.

The CBUAE also decided to “maintain the rate applicable to borrowing short-term liquidity from the CBUAE through all standing credit facilities at 50 bps above the base rate".

The base rate is the interest rate a central bank charges its domestic commercial lenders to borrow money.

“The base rate, which is anchored to the US Federal Reserve’s IOER, signals the general stance of the CBUAE’s monetary policy,” the CBUAE said. “It also provides an effective interest rate floor for overnight money market rates.”

Most GCC central banks follow the Fed moves on key interest rates due to the peg of their currencies to the US dollar, with the exception of Kuwait, whose dinar is linked to a basket of currencies. The region's central banks last reduced rates in March 2020 following the biggest rate cut by the Fed since the 2008 global financial crisis.

On Wednesday, the US central bank officials held interest rates near zero, but signalled they expect two increases by the end of 2023, pulling forward the anticipated date of rate increases as the world’s biggest economy recovers.

Optimism about the labour market and concerns about rising inflation sped up their expected pace of policy tightening.

The Fed will begin a discussion about scaling back bond purchases used to support financial markets and the economy during the pandemic, Fed chairman Jerome Powell said after a meeting with officials.

“The economy has clearly made progress,” Mr Powell was cited by Reuters as saying after the two-day gathering. “You can think of this meeting as the talking-about-talking-about meeting, if you like,” he added, referring to the discussion about tapering purchases.

The central bank held the target range for its benchmark policy rate unchanged at zero to 0.25 per cent – where it has been since March 2020 – and pledged to continue asset purchases at a $120 billion monthly pace until “substantial further progress” had been made on employment and inflation.