UAE consumers to enjoy lower borrowing costs as rates cut to 3.9%

31/10/2025 07:50 AST

Consumers in the UAE are set to enjoy lower borrowing rates as the UAE Central Bank on Wednesday lowered its Base Rate applicable to the Overnight Deposit Facility (ODF) by 25 basis points, from 4.15 per cent to 3.90 per cent, effective from Thursday.

This decision was taken following the US Federal Reserve's announcement today to reduce the Interest Rate on Reserve Balances (IORB) by 25 basis points.

The CBUAE also decided to maintain the interest rate applicable to borrowing short-term liquidity from the CBUAE at 50 basis points above the Base Rate for all standing credit facilities.

Earlier on Wednesday, the Federal Open Market Committee (FOMC) lowered the federal funds rate to a range of 3.75 per cent to 4.00 per cent, following a similar cut in September.

The move, aimed at supporting a slowing job market and navigating persistent inflation, is likely to have ripple effects across the globe.

Analysts cite softening employment data, tariff-induced inflation, and the ongoing US government shutdown, which has disrupted key economic indicators, as primary drivers behind the Fed's decision.

In the UAE, the Central Bank typically mirrors US rate decisions to maintain monetary stability due to the currency peg. As a result, UAE residents and businesses are likely to see lower interest rates on loans, mortgages, and credit facilities. In September, the UAE Central Bank reduced its base rate by 25 basis points to 4.15 per cent, directly following the Fed's move.

Lower rates could stimulate key sectors such as real estate, tourism, and small business lending, while also offering relief to consumers with variable-rate loans. Financial experts suggest that mortgage holders may benefit from reduced monthly payments, and personal loan rates could decline, making borrowing more affordable.

However, the impact may be modest unless the Fed embarks on a more aggressive easing cycle. Analysts note that substantial rate cuts would be required to significantly reduce UAE mortgage costs, with current rates still ranging between 2.5 per cent and 4.5 per cent.

Why is the Fed cutting rates?
The Fed's dual mandate - to stabilise prices and maximise employment - has become increasingly difficult to balance. While inflation remains slightly above the two per cent target, the labour market is showing signs of weakness, with major corporations like Amazon and Target announcing thousands of job cuts. The Fed is prioritising employment risks over inflation concerns, viewing the rate cuts as "insurance" against a potential economic slowdown.

"Markets have been rallying in anticipation of a rate cut today and also at the December meeting. Investors are pricing in a 99.5 per cent likelihood of a 25 bps cut at the conclusion of the Federal Reserve's meeting, according to the CME Fed Watch Tool. The dollar is gaining momentum in the run-up to a packed central bank calendar, with the US Fed & Bank of Japan scheduled to announce their interest rate decision this week. Trader positioning reflects strength in the US economy, with consensus pricing policy easing. If Fed Chair Powell is confident about US growth with slower cuts, the dollar will likely press higher," Vijay Valecha, Chief Investment Officer, Century Financial, told Khaleej Times.

Looking ahead, the Fed is expected to implement another rate cut in December, with projections suggesting the federal funds rate could fall closer to 3 per cent in 2026. However, the path remains uncertain, especially amid political pressure and leadership changes at the Fed.

Khaleej Times