Given that the dirham is pegged to the dollar, the UAE’s central bank is closely following US monetary policy as the countries are closely related.
The Central Bank of the UAE (CBUAE) announced that it would reduce the base rate for its Overnight Deposit Facility (ODF) by 25 basis points. This comes after the US Federal Reserve decided to lower the interest rate. According to the CBUAE, the central bank will also maintain the short-term borrowing rate for all standing credit facilities at 50 basis points.
Given that the dirham is pegged to the dollar, the UAE’s central bank is closely following US monetary policy as the countries are closely related. The Federal Reserve’s decision to cut rates by a quarter percentage point is significant, as it marks the first time in 2025 that it has eased monetary policy. The Federal Open Market Committee voted to bring the benchmark interest rate down to a target range of 4.00% to 4.25%.
One of the most notable objectors was newly appointed Fed governor Stephen Miran, who had only recently joined the board after serving as a White House adviser to President Trump. Miran wanted a more aggressive approach. He wanted a half-percentage-point cut instead of 25 basis points. However, the majority of Fed policymakers wanted to take steps cautiously, since the tariffs have created uncertainty and other economic pressures.
During his press conference on Wednesday, Fed Chair Jerome Powell addressed the criticism that the Fed was acting slow. He took his opportunity to explain that the Fed waited to make its first rate cut of 2025 because officials wanted to evaluate how new tariffs would affect the economy.
He emphasised that the decision to cut rates was made with careful consideration and stated that there was not widespread support for a larger, 50-basis-point cut. Powell also sidestepped questions about whether Miran’s appointment would challenge the Fed’s independence, stressing instead that the central bank remains firmly committed to making independent decisions.
The Fed’s updated projections, known as the “dot plot,” reveal a range of opinions among policymakers about the future direction of interest rates. The median forecast now calls for two additional rate cuts before the end of the year. However, the dot plot shows a clear split: nine officials expect three cuts in 2025, six see only one more cut, one sees no further cuts, and another even projects as many as six.
The Fed now expects inflation to rise by 3.1% this year. Economic growth, as measured by GDP, is forecast to reach 1.6%, an improvement over the 1.4% prediction made in June. Meanwhile, the unemployment rate is expected to go higher to 4.5%, up from the current rate of 4.3%. Policymakers noted in their statement that job gains have slowed and that the labor market is showing signs of “softening.”
In August, the US economy added just 22,000 jobs, while the unemployment rate rose slightly to 4.3% from 4.2%. These developments suggest that the economy is cooling, and the Fed’s goal of striking a balance between stabilizing prices and maximizing employment is being achieved.
Chair Powell acknowledged the complexity of the situation, noting that it is not surprising to see a diversity of views among Fed officials, given the tension to strike a balance.
Both the CBUAE and the US Federal Reserve have taken steps to adjust their monetary policies as the global economy seems to be very uncertain. The next few months will be critical as policymakers watch for signs that the labor market and broader economy are either stabilizing or continuing to slow.