Dubai: The United Arab Emirates central bank’s plan to change the way a key interest rate used to price debt is calculated has been postponed, according to two people familiar with the matter.

For several months, banks that form part of a panel that contributes to the Emirates Interbank Offered Rate every day have been submitting interest rate quotes using both the current and proposed system, the people said, asking not to be identified because the information is private. The new method, which was supposed to be implemented this week, made the rate more volatile, they said.

The change was planned as the Federal Reserve seeks to boost borrowing costs further this year. The UAE typically follows US monetary policy decisions because its currency is pegged to the dollar. The last time the central bank proposed changing the way Eibor is calculated was in 2009, when interest rates plummeted, according to Aarthi Chandrasekaran, the vice president for research at Shuaa Capital in Dubai.

“The prevailing mechanism of capturing Eibor could have been distorted due to the quicker pace of Fed rate movements and the underlying competitiveness of the local economy,” said Chandrasekaran. “The end objective is to fix a rate that provides a fair representation of the prevailing market conditions and to present full transparency behind the process.”

The people didn’t say when, if at all, the new system will be implemented. Banks will continue to submit rates using both methods until the central bank provides fresh instructions, they said. A spokesman for the central bank didn’t respond to a request for comment.

How it’s done

The Eibor, which is used to price billions of dirhams worth of debt each year, is estimated by the central bank as the average of rates submitted by 10 banks, including the local units of HSBC Holdings and Standard Chartered, after excluding the two highest and lowest quotes.

Under the current system, banks largely rely on estimates to determine the rates they would charge each other for short-term loans. The proposed method gives priority to data from existing loans to banks and large companies.

The three-month Eibor climbed 32 basis points in 2017 to 1.8 per cent following interest rate increases in the US. It rose a third day to 1.828 per cent on Thursday.

The central bank publishes the Eibor for overnight, one week, one month, three months, six months and 12 months.