Global interest rates could remain high well into 2027, shaping borrowing conditions in the UAE as the country’s central bank tracks policy moves by the US Federal Reserve, according to Abu Dhabi-based investment firm Lunate.
In its latest outlook, titled Even Higher for Even Longer, Lunate said it expects the Federal Reserve to make one further 25-basis-point increase at its December meeting, taking the policy rate to 4.25%. The firm described that level as the expected peak of the current short tightening phase and said rate cuts are unlikely before late 2027 at the earliest.
The outlook argues that the persistence of higher rates reflects economic strength rather than an approaching global downturn. Lunate said inflation, wage growth, investment spending and overall growth are all running above the levels seen during the period of ultra-low interest rates that followed the global financial crisis.
“Putting it all together, our core view remains that this economic cycle continues to extend rather than roll over,” the report said. “Not simply higher policy rates for longer, but a genuinely higher nominal growth regime.”
UAE exposure to US monetary policy
The UAE’s dirham is pegged to the US dollar, meaning that Federal Reserve decisions are mirrored by the UAE Central Bank. As a result, prolonged high US rates affect financing costs for companies, property developers and consumers in the Emirates.
Lunate identified three drivers that it believes are sustaining inflation and policy rates: persistent wage growth, a renewed escalation in the Middle East that has kept oil prices elevated, and a strong capital-expenditure investment cycle.
The firm forecasts global nominal GDP growth of more than 5% over the coming four quarters. It also expects yields on 10-year US Treasury bonds to remain above 4.5%, a level last seen before the 2008 financial crisis.
“We think the more important story is not inflation itself but the level of nominal GDP growth,” Lunate said. “Yields near 5% in the US are a direct reflection of that shift, not an anomaly.”
Oil income and property-market pressures
Lunate said the UAE could benefit from the higher-growth environment through stronger energy income. Brent crude had risen by more than 44% year-to-date amid renewed geopolitical tensions in the Middle East, according to the report. Higher oil revenues could support government expenditure, infrastructure investment and liquidity across Gulf economies.
For the UAE property market, however, the effects may be less straightforward. Higher rates generally reduce mortgage affordability and tighten financing conditions. Lunate said continued population growth, investor demand and economic expansion could nevertheless offset part of that pressure.
The report drew a distinction between rate increases caused by robust growth and those driven solely by inflation, describing the former as “a fundamentally different, and healthier, phenomenon than higher rates driven by inflation alone”.
Lunate also said the outlook could favour Gulf sovereign wealth funds and private-credit investors. Private credit can perform better during rate-hiking cycles because many loans have floating interest rates, allowing lenders to receive higher returns as benchmark rates increase.
Although highly leveraged companies may face challenges from persistently expensive borrowing, the firm said it expects the global economy to remain resilient. For the UAE, its outlook points to continued investment activity and supportive energy revenues while businesses and consumers adapt to borrowing costs that may not return to pre-pandemic lows in the near term.
Source: Khaleej Times
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