Interest rates to surpass 5% but experts predict drop

Reuters/Brendan McDermid

• Analysts expect first half of year to get tougher
• But inflation rate will moderate in final six months
• Expert advises to ‘enjoy the sweet spot’

Interest rates will climb beyond 5 percent by the middle of 2023 before stabilising later in the year, according to senior UAE banking experts.

Martin Tricaud, group head of investment banking at First Abu Dhabi Bank, warned there was no timeline to predict when rates would start to fall, but he remained confident that “the outlook for the rest of the year and probably the second half of the year is very positive” for the region.

GCC central banks raised interest rates last month following an eighth consecutive hike by the US Federal Open Market Committee. At 25 basis points it was the lowest increase yet as part of continuing efforts to stymie inflation.

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Addressing a panel discussion at the Abu Dhabi Economic Summit this week, Tricaud said: “There is still a little bit of rate movement to come towards the end of the first half of the year. The probability of interest rates exceeding 5 percent is now certainly higher.

“It is also very likely that we will see it plateau towards the end of the first half and the beginning of the second half. 

“We see a moderation in the inflation rate and we see the decrease is likely to happen in the relatively near future.”

Inflation across the GCC averaged between 5 and 6 percent throughout 2022, its highest in over ten years although lower than many other countries. The annual inflation rate in the UK, for example, fell to 10.1 percent in January of this year from 10.5 percent in December.

Simon Williams, chief economist, CEEMEA at HSBC, who covers 20 emerging markets across the region, said that while some countries were experiencing as much as triple digit inflation, the currency peg to the dollar, coupled with ongoing energy subsidies, had helped contain levels in the GCC.

“Inflation will be sticky,” Williams said. “It’s going to take time to come down, but I do think we’re on the downward path so some of the global inflation perhaps did feed through into the GCC, but I think it will diminish as this year goes on.”

Global growth is projected to slow to 2.7 percent, according to the International Monetary Fund, although forecasts for the GCC in 2023 are more upbeat, with 3.6 percent GDP growth expected.

In the UAE, in particular, GDP grew 7.6 percent in 2022, economy minister Abdullah bin Touq Al Marri said on Thursday at the Investopia conference in Abu Dhabi.

Williams said the GCC is his “happy place in the emerging world right now” and boldly exclaimed that the region is “in the sweetest of sweet spots”.

“If the region was struggling to generate growth then these higher interest rates would be a problem,” he said.

“What I really like is that growth is well balanced. I don’t have worries about inflation; I don’t have worries about public finances; I don’t have worries about the external accounts.

“My advice to you would be to enjoy it. Nothing lasts forever, these periods don’t come along that often but, when they are here, seize the opportunities that they represent and take your profits while you can and also make sure your policy settings are made in anticipation of periods like this inevitably being finite.”