Today's Edition
MAYS IBRAHIM (ABU DHABI)
The UAE and other Gulf economies are poised to benefit from the US Federal Reserve’s recent 25 basis point rate cut, with lower borrowing costs expected to support both consumer spending and business investment.
This was the first change in the Fed’s benchmark funds rate since December 2024, with the target range set at 4.00%–4.25%.
GCC central banks, including the UAE, Saudi Arabia, Qatar, Bahrain, Oman, and Kuwait, have mirrored the Fed’s move, reducing benchmark policy rates by 25bps due to their currency pegs.
The rate cuts come at a time of accelerating private sector credit growth in the Gulf.
In the UAE, banks’ outstanding credit to the private sector grew by more than 8% YoY in 2025, up from 7% in 2024, while Saudi Arabia’s private sector credit demand has surged over 14% year-to-date through July, compared with around 11% last year.
“As rates move lower, that will free up more income for consumption and investment and at the margin create more demand for credit,” the Emirates NBD report noted.
The non-oil economy remains a key driver of corporate borrowing in the UAE, with recent surveys indicating that interest rates were among the least critical factors affecting loan demand.
Companies are increasingly focused on growth in sectors outside of oil, suggesting that rate cuts could reinforce the ongoing diversification of Gulf economies.
A recent Central Bank of the UAE survey on credit demand noted that interest rates were the least critical variable affecting loan demand, with corporates instead focused on matching the performance of the non-oil economy.
Legal and business experts say the cuts could boost entrepreneurship and foreign investment.
Ashish Mehta, founder and managing partner of Ashish Mehta and Associates, noted that the US Fed’s rate cuts are expected to create an even more conducive business environment in the UAE, supported by easier access to bank financing.
Businesses rely on external funding, especially new and growing ones, he explained. With capital contributions often insufficient, high interest on business loans discourages entrepreneurs and business owners from pursuing expansion plans.
“In these circumstances, even marginal cuts in interest rates become invigorating because of lower borrowing costs and improved profitability – with substantially more funds at the end of an accounting period,” Mehta told Aletihad. “Naturally, this encourages investors, who have so far been only toying with the idea of owning a business in the UAE, to finally take the plunge.”
The rate cuts augur well particularly for sectors reliant on regular bank financing, such as manufacturing, construction, services, retail, and exports, according to Mehta.
Varun Newar, manager at MMJS Consulting, added that the decline in borrowing costs will ease financing pressures on UAE businesses.
New loans will become cheaper, while companies with floating-rate facilities are also expected to see their repayment costs fall, Newar told Aletihad.
For larger corporate groups, he explained that holding companies that secure funding from banks can pass on those lower borrowing costs to their subsidiaries, enabling them to channel more resources into capital expenditure while the parent company is compensated through holding fees.
The Fed’s decision was not unanimous, with recent Trump appointee Stephen Miran voting for a larger 50bps cut, while Christopher Waller and Michelle Bowman voted with the majority.
Emirates NBD Research pointed out that the Fed’s focus has shifted from concerns about potential inflation from tariffs on imports to worries over a weakening labour market.
The updated Summary of Economic Projections showed most voting members expect a further 50bps of cuts this year, likely in two additional 25bps moves.
The next FOMC meeting at the end of October is expected to remain a live meeting, with nearly 90% of the market pricing in another 25bps cut.
“For 2026, the Fed projected a more hawkish stance than markets are expecting as it keeps an eye on the inflationary risks of tariffs and sticky services inflation.”
Emirates NBD researchers predict that the Fed will need to cut rates next year, targeting an end of 2026 Fed Funds rate at 3%.
