The US Federal Reserve cut interest rates by 25 basis points on Thursday, its second rate cut since the Covid-19 pandemic. This takes the interest rates to the 4.5-4.75 percent range.
The rate cut was widely in line with what economists expected. The CME FedWatch tool had anticipated a 97.5 percent chance of a 25-basis-point cut.
Recent indicators suggest that economic activity has continued to expand at a solid pace. Since earlier in the year, labor market conditions have generally eased, and the unemployment rate has moved up but remains low, the Fed said.
“Inflation has made progress toward the committee’s 2 percent objective but remains somewhat elevated,” the Federal Open Market Committee said.
UAE central bank reduces rates
Shortly after the Fed reduced interest rates, the Central Bank of the UAE (CBUAE) decided to cut the base rate applicable to the overnight deposit facility (ODF) by 25 basis points, from 4.90 percent to 4.65 percent, effective from Friday, November 8.
The CBUAE also decided to maintain the interest rate applicable to borrowing short-term liquidity from the CBUAE at 50 basis points above the base rate for all standing credit facilities.
The base rate, which is anchored to the US Federal Reserve’s IORB, signals the general stance of monetary policy and provides an effective floor for overnight money market interest rates in the UAE.
Implications of the rate cut
The rate cut is expected to have several implications for the economy, such as lower borrowing costs and increase potential for inflationary pressure.
Lower interest rates can stimulate borrowing and investment, boosting economic activity. Consumers may benefit from lower mortgage rates and other loan costs, while businesses may be encouraged to expand and hire.
While the Fed’s primary goal is to support economic growth, there is a risk that lower interest rates could reignite inflationary pressures. Therefore, the Fed will need to closely monitor economic indicators and adjust policy as needed to balance growth and price stability.
The rate cut is also likely to have a positive impact on financial markets, particularly for stocks and bonds. Lower interest rates can increase the value of assets, leading to higher stock prices and lower bond yields.
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