The UAE Central Bank (CBUAE) kept interest rates unchanged on Wednesday after the US Federal Reserve held interest rates steady citing “lack of further progress” on inflation.
The CBUAE has decided to maintain the base rate applicable to the overnight deposit facility (ODF) at 5.40 percent.
“The CBUAE has also decided to maintain the interest rate applicable to borrowing short-term liquidity…at 50 basis points above the base rate for all standing credit facilities,” the central bank said.
The Fed, while announcing its stance, said that the US economy has continued to expand and unemployment rate has remained low. However, it sounded a warning on inflation.
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“Inflation has eased over the past year but remains elevated. In recent months, there has been a lack of further progress toward the committee’s 2 percent inflation objective,” the Fed said in a statement.
The Fed added that it will not “be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent”.
Interest rate cuts by the US Federal Reserve, expected earlier this year, have been delayed due to stubbornly high inflation. The Fed aims for a 2 percent annual inflation rate, but their preferred gauge, the personal consumption expenditures price index, rose 2.7 percent in March compared to last year. This slow progress on inflation forced the Fed to keep interest rates on hold since July, currently between 5.25% and 5.50%.
Shift in approach
On Wednesday, the Fed also indicated a shift in its approach to unwinding a pandemic-era stimulus program. The Fed will begin to slow down its purchases of Treasury securities and mortgage-backed bonds, a key policy used to stabilize markets and keep interest rates low during the COVID-19 crisis.
Previously, it let $95 billion in securities mature monthly, bringing its total holdings down from $8.9 trillion in June 2022 to $7.4 trillion currently. Starting in June, the Fed will slow this process, allowing only $60 billion in bonds to mature each month.
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