The UAE Central Bank on Wednesday lowered its benchmark interest rate, mimicking the US Federal Reserve’s move to cut its policy rate, the first since President Donald Trump resumed office in January.
After hitting the pause button for several quarters, the rate cut comes amid mounting pressure from the White House and open criticism of the Fed from Mr Trump amid weakening US economy.
The Fed lowered its benchmark rate a quarter of a percentage point, to the range of 4 per cent to 4.25 per cent, at the end of the two-day meeting of the rate setting Federal Open Market Committee.
With the much anticipated cut in the benchmark interest rates, the US has entered the latest monetary policy easing cycle as the Fed tries to stave off a recession, quell divisions within the bank and fend off pressure from Mr Trump, who has been demanding a major rate cut to reboot growth in the world’s biggest economy.
Most central banks in the six-member economic bloc of GCC move in lock-step with the Fed's policy rate moves because their currencies are pegged to the US dollar, with Kuwait the only exception in the Gulf region as the dinar is tied to a basket of currencies.
The UAE Central Bank said it would cut the base rate applied to its overnight deposit facility by 25 basis points to 4.15 per cent, from 4.40, effective Thursday.
The base rate, which is anchored to the Fed's interest on reserve balances (IORB), signals the general stance of the Central Bank's monetary policy and provides an effective interest rate floor for overnight money market rates.
Strong economic fundamentals
The UAE economy, which has maintained a robust growth momentum since the coronavirus pandemic driven slowdown, grew by 3.9 per cent on an annual basis in the first quarter of 2025.
Gross domestic product at the end of the three-month period rose to Dh455 billion, according to preliminary estimates released by the Federal Competitiveness and Statistics Centre earlier this month.
Non-oil GDP posted 5.3 per cent rise on yearly basis, rising to Dh352 billion, contributing more than 77 per cent of total real GDP as the country continues to diversify its economy away from oil.
Non-oil contributions to GDP have risen consistently in the past five years, from 71.3 per cent level in 2020. Oil-related activities accounted for 22.7 per cent of GDP in the first three months of 2025.
Non-oil private sector activity in the UAE also rose in August, with output growth and business confidence increasing in the Arab world's second-largest economy, driven by the fastest pace of activity in six months.
The seasonally adjusted S&P Global UAE Purchasing Managers' Index climbed to 53.3, from 52.9 in July, partly boosted by an expansion in output levels in the third quarter.
The CBUAE expects the UAE’s GDP to expand at 4.7 per cent in 2025 and by 5.7 per cent in 2026. The country’s non-oil economy is set to grow by 5.1 per cent this year.
The banking regulator estimates the country’s hydrocarbons economy to jump by 3.6 per cent in 2025 and by 8.5 per cent the following year.
Inflation in the UAE stood at 1.4 per cent in the first quarter of 2025 and the central bank has slightly revised down its inflation forecast for 2025 to 1.9 per cent from 2 per cent.
The UAE Central Bank has also lowered its inflation estimate for 2026 to 1.9 per cent from 2.1 per cent.
