Borrowing made lighter in UAE
dubai — The cost of borrowing for property, automobile and personal needs has become more economical in the UAE after the central bank cut interest rates, in line with the US Federal Reserve’s move late on Tuesday.
Analysts said the rate cut is positive for a credit-driven economy like the UAE and it will also provide some boost to capital markets, which have witnessed major losses in the past week.
However, the latest rate cut failed to cheer stock markets in the UAE and other GCC countries because new cases of coronavirus dampened investor sentiment, pushing Dubai and Abu Dhabi markets lower by 2.2 per cent and 2.8 per cent, respectively.
Bahrain and Saudi Arabia also lowered rates but the news failed to give a fillip, with its bourses dipping 0.5 per cent and 0.4 per cent, respectively. Qatar enacted a larger 75 bps cut to its lending rate — its deposit rate was slashed by 50 bps — while Kuwait lowered its lending rate by 25 bps.
We see the rate cuts as positive given the rising economic impact of Covid-19, thereby reducing debt-servicing costs for corporates and individuals Monica Malik,
Chief economist of Abu Dhabi Commercial Bank
The coronavirus situation is nothing more than a knowledge gap... the economic impact of this virus is still very much unknown Naeem Aslam,
Chief market analyst at AvaTrade
The UAE Central Bank on Wednesday lowered interest rates applied on certificates of deposits by 50bps. Certificates of deposit, which the central bank issues to banks operating in the country, are the monetary policy instrument through which changes in interest rates are transmitted to the UAE banking system.
The 50bps cut in rates was an emergency move by the US central bank to cushion the economic impact from the fast-spreading coronavirus. The move surprised investors as the market was expecting a 25bps cut at the Fed meeting on Tuesday evening.
“We see the rate cuts as positive given the rising economic impact of Covid-19 in the region, thereby reducing debt-servicing costs for corporates and individuals. However, by itself, we expect the monetary easing to have a limited impact in offsetting the uncertainty or transmission mechanism from the spread of the virus,” said Monica Malik, chief economist of Abu Dhabi Commercial Bank.
“The cut in interest rates is seen as a blessing as it will certainly help mitigate the losses arising from a dip in the tourism and energy sectors. Disruptions to trade, supply chains and tourism has already impacted the oil-rich economy and is threatening to derail the economy further,” said Vijay Valecha, chief investment officer of Century Financial.
He said lower mortgage rates resulting for the interest rate cut should certainly attract more investors to the real estate market. From a macroeconomic perspective, lower cost of money across the globe will also support the investment inflows in the run-up to Expo 2020.
Stuart Roe, head of mortgages at Allsopp & Allsopp, sees a 0.5 per cent rate cut will encourage new buyers who were perhaps on the fence about buying a property to take action.
“First-time buyers will see their affordability slightly increase with this recent cut... these interest cuts will not only affect the first time buyer but a big impact will be seen by homeowners who are on a variable rate mortgage. However, in my opinion, it will take longer for the impact to trickle down to the longer-term fixed mortgage rates,” said Roe.
Overreaction
Naeem Aslam, chief market analyst at AvaTrade, believes the Fed has overreacted just like the markets have.
“The reason that we say that is because we do not see much evidence of a liquidity crisis; the coronavirus crisis is more of a health issue. Basically, the coronavirus situation is nothing more than a knowledge gap; we do not know the exact numbers of people who are infected or numbers of people who have recovered. More importantly, the economic impact of this virus is still very much unknown,” Aslam said in a note.
Simon Ballard, chief economist at First Abu Dhabi Bank, said the market is less than impressed and will now be questioning Fed’s credibility.
“This was wasted ammunition, driven by politics not economics or medical science,” he said.