The UAE Central Bank has cut interest rates twice in two months, bringing the base rate down to 3.90%, the lowest since 2022/ Image: File
The Central Bank of the UAE (CBUAE) has reduced the Base Rate applicable to the Overnight Deposit Facility (ODF) by 25 basis points, from 4.15% to 3.90%, effective Thursday, October 30. This marks the second rate cut this year and brings the benchmark rate to its lowest level since 2022. The move follows the US Federal Reserve’s decision earlier today to lower its Interest Rate on Reserve Balances (IORB) by 25 basis points, the second consecutive cut this year. The UAE typically mirrors US monetary policy to maintain the stability of the dirham, which is pegged to the US dollar. Under the new decision, the UAE Central Bank will also maintain the interest rate applicable to borrowing short-term liquidity from the Bank at 50 basis points above the Base Rate for all standing credit facilities.
Background: A second cut in two months
In September 2025, the Central Bank reduced the Base Rate from 4.40% to 4.15%, following the Fed’s rate cut the previous day. That was the first policy easing since December 2024, when the Fed had reduced its target range to 4.25%–4.50%.With the latest adjustment, the Fed’s target federal funds rate now stands at 3.75%–4.00%, which the UAE has mirrored. The Base Rate serves as a key indicator of the Central Bank’s monetary stance and acts as an effective floor for overnight market rates.
Why the UAE follows the fed
The UAE’s monetary policy moves in lockstep with the US Federal Reserve due to the dirham’s peg to the US dollar, established in 1997 at a fixed rate of 1 USD = 3.6725 AED. The peg provides exchange rate stability, crucial for oil trade (which is priced in US dollars) and for investor confidence. However, it also means the UAE has limited monetary policy independence, aligning its interest rate changes with the Fed to prevent capital outflows and currency volatility.
Impact: Lower borrowing costs, sectoral boost
The latest rate cut is expected to reduce borrowing costs across the UAE, affecting consumer loans, mortgages, and business credit.Key beneficiaries include:
- Real Estate: Lower mortgage rates could revive demand among first-time buyers and property investors.
- Tourism and Retail: Cheaper borrowing may lift consumer spending and support domestic travel demand.
- SMEs and Corporates: Easier access to credit could spur business expansion and capital investment.
Financial experts say mortgage holders may see slightly lower monthly payments, while personal loan and credit card rates could ease as well. However, the overall impact may remain modest unless the Fed pursues a more aggressive easing cycle. At the same time, returns on fixed deposits and bonds are likely to decline, pushing investors toward equities and real estate, which tend to perform better in low-interest environments.
Explained: What is a currency peg?
A currency peg, or fixed exchange rate, is when a central bank maintains its currency’s value at a constant rate against another currency.Benefits include:
- Reduced exchange rate risk in trade and investment
- Stable import prices
- Enhanced investor confidence due to currency predictability
As of 2024, 12 countries worldwide maintain pegs to the US dollar, with the UAE being one of the most stable and long-standing examples in the Middle East. Go to Source
