A large national flag of the UAE flies from a flagpole on the Jumeirah beach road in Dubai. Most Gulf States including the UAE tie their currencies to the dollar, limiting their room to pursue independent monetary policies, and the UAE governor reiterated its “continued commitment” to the dollar peg yesterday.

Reuters
Dubai
There would be an “appropriate adjustment” in interest rates in the UAE following any hike in rates in the US, the governor of the UAE central bank said yesterday.
Mubarak Rashed al-Mansoori also told a banking conference in Dubai it was closely monitoring the banking sector to ensure risks, including lower oil prices and customer deposits, do not escalate into a wider problem.
Speaking on interest rates, al-Mansoori said the “immediate impact on our side will be an appropriate adjustment of our ... rates, especially at the short end.”
Upward pressure on rates was expected to increase if and when the US Federal Reserve starts tightening monetary policy in coming months.
Most Gulf States including the UAE tie their currencies to the US dollar, limiting their room to pursue independent monetary policies, and the UAE governor reiterated its “continued commitment” to the peg yesterday.
Not all countries in the region have been as explicit in following US moves as the UAE though. Qatar’s central bank governor said last month he saw no reason to imitate any US hike due to rising liquidity in the local banking system.
Three-month money market rates in the UAE have been rising due to lower liquidity in the system, hitting its highest level since at least mid-2013 last week.
Al-Mansoori also said the central bank was watching the local banking system for signs of stress.
“With the major stakeholders, the central bank is closely monitoring the financial soundness indicators for the banking sector to make sure potential vulnerabilities are identified and appropriate measures are taken on time to hedge against risks that could escalate to a full-blown crisis as our experience has taught us,” al-Mansoori said.
UAE banks at the end of the last decade were hit by a local real estate crash and a debt crisis at Dubai state-linked companies, which forced them to set aside significant cash for bad loans, crimped profits for a number of quarters, and increased loan rates.
Al-Mansoori added that among the main challenges for the banking system were a global economic slowdown, lower oil prices, which could lead to further fiscal consolidation, and further tightening in bank liquidity due to a slowdown in customer deposit levels.
While system-wide deposits continue to grow — rising 1.6% year on year in September, according to the latest central bank data — a number of local banks have seen a decline as lower oil revenue has reduced the amount of cash being placed on deposit.
National Bank of Abu Dhabi, the UAE’s largest bank by assets, said last month government deposits dropped by 48bn dirhams ($13.1bn) in the past 12 months.