UAE Slashes Rates: What It Means

UAE Interest Rate Cut: What the 3.90% Base Rate Means for Citizens and Businesses?

In a recent financial decision, the Central Bank of the United Arab Emirates (CBUAE) reduced the base rate for overnight deposit facilities by 25 basis points, from 4.15% to 3.90%. This measure took effect on October 30, 2025, and is a direct response to a similar rate cut by the United States Federal Reserve (Fed), marking the second cut this year.

Why does the UAE follow the Fed's decisions?

The UAE's monetary policy is closely tied to the US, as the dirham is pegged to the US dollar. This fixed exchange rate system provides stability for the country's foreign trade and financial system, but it also means the country's central bank, the CBUAE, has limited room for independent interest rate policies. When the Fed cuts its benchmark rate, the UAE practically has to follow, otherwise the balance of the exchange rate system could be disrupted, leading to capital outflows.

What does this decision mean for the public?

The central bank's base rate cut theoretically means cheaper loans for the public, especially for those with variable-rate loans, such as mortgages. The cost of new loans may also decrease as commercial banks often adjust their own interest rates in line with central bank rates.

Additionally, the rate cut could stimulate consumption since it will be cheaper to obtain credit, encouraging the public to spend more freely on larger investments such as buying cars, home renovations, or travel.

It is important to note that the impact of the rate cut is not immediate and automatic: commercial banks gradually implement the changes based on their own decisions.

How does it affect businesses?

For the corporate sector, the rate cut is good news, particularly for small and medium enterprises that often rely on external funding. The reduced interest environment can result in lower financing costs for loans related to operations, expansion, or development.

The construction, real estate, and retail sectors may be the biggest beneficiaries of the rate cut since liquidity and financial flexibility are crucial in these industries. Dubai's real estate market, for instance, is sensitive to changes in interest rates, and more favorable loan conditions could entice investors to make new purchases or participate in projects.

From the saver’s perspective, it’s not all positive

While borrowers and businesses stand to gain from the rate cut, savers may be less pleased with such decisions. Interest rates paid on bank deposits may also fall, meaning safer savings forms will be less attractive. This could be particularly disadvantageous for older individuals or those seeking secure investments.

However, in a lower interest rate environment, there could be increased investment appetite in the stock market, equities, bonds, or even alternative assets as the pressure to search for yields increases.

International implications and inflation concerns

The rate cut cannot be viewed in isolation but as part of the global economic environment. The Fed’s recent move – along with the UAE's central bank – opted for the rate cut because global growth prospects are slowing and inflation remains under control.

Currently, the UAE’s inflation rate is modest, so there is no danger that the rate cut would trigger runaway prices. In contrast, economic stimulation is now a primary focus, especially in light of the Expo City Dubai development plans and forthcoming international events.

Medium-term outlook

If the Fed executes further rate cuts in the coming months, the UAE is expected to follow. This indicates a gradual but noticeable ease in monetary policy that could stimulate borrowing and economic activity.

However, policymakers need to find a balance: excessive rate cuts risk inflation and excessively rising asset prices, particularly in real estate.

Final Thoughts

Dubai and the entire UAE's financial system operates in tune with global markets, and the dirham's peg to the dollar means it directly responds to changes in US monetary policy. The reduction of the central bank's base rate to 3.90% not only offers the possibility of better conditions for borrowers and businesses but also signals an intention to stimulate economic policies.

Citizens and businesses should closely follow how local banks respond to this decision and what new opportunities arise in the lower interest environment, be it in credit, investments, or even purchasing property in Dubai.

(Source of the article: UAE Central Bank release.)