Are days of easy money ending?
Borrowing could become expensive this year as interest rates may go up.
dubai — 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
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
MR Raghu, managing director, Marmore Mena Intelligence
FOMC meetings in 2018. In 2017, we saw interest rate hikes in March, June and December,” says M.R. 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 revisits this plan as rising oil and commodity prices may affect inflation, which is currently well under their target levels. One of the factors behind rising prices is the geo-political situation. If the 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.”
Kumar says the Fed is unlikely to increase beyond 0.25 per cent per leg in 2018 because low unemployment and inflation open the path for a gradual increase in rate.
The benchmark interest rate in the UAE was last recorded at 2 per cent. Interest rates in the UAE averaged 1.31 per cent from 2007 until 2017, reaching an all-time high of 4.75 per cent in November
The interest rate in the UAE is expected to be around 2.25 per cent by the end of this quarter Rajiv Kumar, deputy CEO, Phillip Capital
of 2007 and a record low of 1 percent in January of 2009.
He says the UAE banks maintain a good balance sheet and improved liquidity growth positions them well to increase rates in tandem with US policy. The rate hike for property loans may not move up in tandem with other segments in order to support end-users.
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 on a quarter-onquarter 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,” advises Raghu.
Kumar says the rate rise may affect all borrowings — credit card/ personal loan, car loan, housing loan and mortgages.
He advises residents to take advantage of a reduced interest rate. With the dirham pegged to the dollar, there is a good likelihood of interest rates going up from the current levels in the next couple of quarters.
“The interest rate in the UAE is expected to be around 2.25 per cent by the end of this quarter. Looking forward, the estimated rate stands at around 2.5 to 2.75 per cent in 12 to 15 months’ time.
“In the long term, the rate may even go up further. Apparently, rates are not declining anytime soon and borrowing is going to be expensive in the short to medium term. As far as mortgage loans, it’s better to go for fixed rate loans than for 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,” suggests Kumar.
— waheedabbas@khaleejtimes.com