Monetary Policy Framework
The UAE dirham has been pegged to the US dollar at a fixed rate of AED 3.6725 per USD since 1997. This arrangement effectively imports US monetary policy, as the Central Bank of the UAE (CBUAE) must align its benchmark interest rates with the Federal Reserve to maintain the peg. The currency board mechanism provides exchange rate certainty, which supports trade, investment, and capital flows, but eliminates independent monetary policy as a tool for managing domestic economic conditions.
The CBUAE retains authority over macroprudential regulation, reserve requirements, and liquidity management, providing secondary instruments to influence credit conditions and financial stability.
Interest Rate Transmission
| Date | Fed Funds Rate (%) | CBUAE Base Rate (%) | UAE Interbank Rate (3M EIBOR, %) |
|---|---|---|---|
| Dec 2022 | 4.25-4.50 | 4.40 | 4.87 |
| Dec 2023 | 5.25-5.50 | 5.40 | 5.61 |
| Jun 2024 | 5.25-5.50 | 5.40 | 5.48 |
| Dec 2024 | 4.25-4.50 | 4.40 | 4.62 |
| Jun 2025 | 3.75-4.00 | 3.90 | 4.14 |
| Dec 2025 | 3.50-3.75 | 3.65 | 3.88 |
The Federal Reserve’s easing cycle, which commenced in September 2024, has transmitted directly to UAE interest rates. The reduction of approximately 175 basis points between peak and the latest reading has eased financing conditions for both corporate and consumer borrowers.
Inflation Dynamics
| Component | 2022 (%) | 2023 (%) | 2024 (%) | 2025 Est. (%) |
|---|---|---|---|---|
| Headline CPI | 4.8 | 3.1 | 2.3 | 2.1 |
| Housing & Utilities | 6.2 | 4.8 | 3.7 | 3.4 |
| Food & Beverages | 5.1 | 3.4 | 2.1 | 1.8 |
| Transport | 8.4 | 2.8 | 1.4 | 1.2 |
| Education | 3.2 | 3.1 | 2.8 | 2.9 |
| Healthcare | 2.6 | 2.4 | 2.2 | 2.3 |
| Recreation & Culture | 3.1 | 1.9 | 1.6 | 1.4 |
| Core CPI (ex-food, energy) | 3.4 | 2.7 | 2.4 | 2.2 |
Headline inflation has moderated from the 2022 peak, when global supply chain disruptions and energy price spikes pushed CPI above 4.5%. The principal domestic inflationary pressure remains housing costs, particularly in Dubai and Abu Dhabi, where population growth and commercial demand continue to outpace supply additions in premium segments.
The Peg Debate
The AED-USD peg periodically attracts scrutiny regarding its appropriateness for the UAE economy. Proponents emphasise exchange rate stability, credibility, and the alignment of interests given the dollar-denominated nature of oil revenues. Critics note that imported monetary policy may be pro-cyclical: when oil prices rise and the UAE economy strengthens, US rates may be tightening for unrelated reasons, and vice versa.
The current consensus among policymakers and market participants strongly favours maintaining the peg. The credibility benefits, combined with the UAE’s substantial foreign reserve buffers exceeding USD 180 billion, make the arrangement sustainable and well-anchored. The CBUAE’s macroprudential toolkit provides sufficient flexibility to address domestic credit and financial stability concerns independently of rate-setting.
Macroprudential Measures
The CBUAE has deployed several macroprudential instruments to manage sector-specific risks without altering the headline interest rate. Loan-to-value caps on mortgage lending, limits on personal loan exposure relative to income, and sector-specific provisioning requirements for bank lending to real estate developers constitute the primary toolkit.
In 2024-2025, the CBUAE tightened mortgage lending standards for non-resident buyers in response to speculative activity in the Dubai property market, while simultaneously easing SME lending requirements to support private-sector growth.
Outlook
The UAE’s monetary framework is expected to remain anchored to the dollar peg for the foreseeable future. The Federal Reserve’s gradual easing cycle will continue to transmit lower interest rates to the UAE economy, supporting credit growth, real estate demand, and corporate investment. The CBUAE’s macroprudential toolkit will remain the primary instrument for managing domestic financial stability risks. Inflation is projected to remain benign at 2.0-2.5% through 2026, barring external supply shocks.