Dubai: The US Federal Reserve’s move to increase its benchmark interest rate will ultimately burden UAE borrowers, including credit card users, according to a financial expert.
In particular, interest rates for car loans, personal loans, credit card balances and mortgage will most likely rise, making it more expensive for borrowers to repay rising debts. Among those who will feel the financial burden are borrowers who signed up to floating interest rates.
For the third time in ten years, the Fed on Wednesday ruled to adjust the funds rate by 0.75 per cent to 1 per cent amid growing sentiment that the American economy is on a strong footing and is poised for more robust growth.
Shortly after the decision was announced, the UAE Central Bank adjusted the rates applicable to certificates of deposit by 25 basis points, the impact of which is expected to trickle down to residents with existing loans and those that are still planning to secure one.
“The higher interest charge for banks would be passed on to the customers in the form of higher loan rates. Though the rate hike is on short-term interest rates, it is expected to trickle down to medium-term and long-term rates, affecting personal, auto and home loans,” Raghu Mandagolathur, senior vice president for research at Kuwait Financial Centre “Markaz” told Gulf News.
Raghu explained that the rate at which banks charge their customers who borrow money, including those with outstanding credit card balances, is usually pegged to the repo rate, hence it is likely that the adjustment will be passed on to customers.
“Increase in repo rates would be passed on to the customers in the form of higher annual percentage rate for variable rate credit cards,” he said.
For those looking for vehicle financing, borrowing costs could go up as well. “Financial charge for car loans would rise. Though the current rise is 25 basis points, a series of rate hikes would make borrowing expensive on a relative basis.”
Residents with an existing loan or mortgage will likely find their monthly repayments rise as well, especially if the loan agreement they signed up to allowed for their annual interest rates to adjust with the market.
“Those who have availed [themselves of] floating rate loans would be faced with higher equated monthly instalments. Considering the outlook for interest rates and expectations of further hike, consumers could consider refinancing their mortgage to fixed rate,” added Raghu.
While banks are quick to pass on higher interest rates to borrowing customers, interest rates on savings will not likely go up. Raghu said banks often take the ‘opposite approach’ for returns on deposit accounts.