UAE Central Bank follows US Fed move to raise interest rates in effort to curb inflation

On Wednesday, 4 May, the US Federal Reserve Board increased the interest on reserve balances (IORB) by 50 basis points for the first time since 2000.

The UAE Central Bank’s base rate, which is anchored to the US Federal Reserve’s IORB, signals the general stance of the CBUAE’s monetary policy.

It also provides an effective interest rate floor for overnight money market rates, the state-run news agency, Wam reported.

Additionally, the UAE Central Bank has decided to maintain the rate applicable to borrowing short-term liquidity from the CBUAE through all standing credit facilities at 50 basis points above the base rate.

US Federal Reserve Chair Jerome Powell said similar moves were on the table for June and July in an effort to curb surging inflation, according to Bloomberg.

“Inflation is much too high and we understand the hardship it is causing, and we’re moving expeditiously to bring it back down,” Powell said during a press conference.

The Fed’s hope this time around is that the combination of rising borrowing costs and a shrinking balance sheet will deliver a soft landing that avoids recession while tamping down inflation, though Powell implied this might not be possible without hurting growth, Bloomberg reported.

“Yes, there may be some pain associated with getting back to that,” Powell said. “But the big pain is not dealing with inflation and allowing it to become a contraction.”

Looking forward, Powell added half-point increases were on the table for the next two policy meetings and suggested that officials could then throttle their hiking pace to quarter-point increases starting in September, provided price pressures showed signs of cooling.

Fed officials say they want to raise rates until they reach the level that neither speeds up not slows down the economy – known as the neutral rate.