Understanding the Central Bank's Recent Decision on the Base Rate

Late on May 7, 2025, the Central Bank of the UAE (CBUAE) announced that it would keep its key Base Rate—the rate on its Overnight Deposit Facility (ODF)—unchanged at 4.40 percent. This decision aligns with the U.S. Federal Reserve’s choice earlier that day to hold its Interest Rate on Reserve Balances (IORB) steady. It highlights the UAE’s dollar-pegged monetary framework and the close alignment of its policy with U.S. rates.

Why the Base Rate Matters

The Base Rate is crucial as it anchors money-market rates in the UAE. Banks use it to price various financial products:

• Short-term funding: This includes interbank loans and liquidity facilities.

• Loan products: Both corporate and retail financing rely on the Base Rate plus a spread for pricing.

• Deposit products: Deposit rates generally follow the Base Rate, although they adjust more slowly.

  
  

By maintaining the Base Rate at 4.40 percent, the CBUAE indicates its intent to sustain current monetary conditions, avoiding both stimulus for growth and tightening to control inflation.

Impact on Deposit Rates

1. Savings Accounts Remain Low-Yielding

Despite a Base Rate of 4.40 percent, most retail savings accounts in the UAE currently offer nearly zero headline rates. This situation leaves savers with limited options.

2. Short-Term Deposits vs. Base Rate

The Dirham Overnight Interest Average (DONIA)—the actual overnight interbank rate—has been around 12 basis points below the Base Rate, settling at about 4.28 percent. This gap indicates excess liquidity in the banking system and establishes a floor for what institutions earn on overnight funds.

3. Time Deposits Offer Modest Pickup

Fixed-term deposits, such as those lasting one year at major banks, currently yield around 2 to 3 percent. While this is below the Base Rate, it is notably higher than what instant-access savings accounts offer. Banks price these products to maintain their net interest margins, which means depositors earn only a fraction of the Central Bank’s rate.

What May Savers Do?

Shop Around for Special-Offer Deposits

Some banks provide promotional “booster” deposits that can offer rates up to 3.3 percent for limited periods (like 18 months) and require minimum balances. These options can help narrow the gap to the Base Rate.

Consider Money-Market Funds

With DONIA around 4.28 percent, both institutional and retail money-market funds can provide yields closer to the actual overnight rate. Often, they outperform traditional bank deposit products.

Ladder Term Deposits

Creating a “ladder” of staggered maturities allows you to reinvest portions of your savings at potentially higher rates in the future. This strategy helps retain some liquidity while waiting for favorable rate changes.

Evaluate Alternative Income Instruments

High-quality corporate bonds, sukuk, and other short-duration fixed-income instruments can offer yields exceeding bank deposits. However, they do come with credit-risk considerations that savers should evaluate carefully.

Looking Ahead

With rising global economic uncertainties, particularly concerning inflation and employment, the U.S. Federal Reserve has hinted that rate cuts may be postponed. Consequently, the CBUAE is likely to maintain its current rate until clearer indications of price stability and growth surface.

• If inflation in the UAE remains contained, deposit rates may continue to stay flat, helping to preserve banks’ funding costs.

• If global rates decline, the Base Rate could eventually see a reduction, further squeezing deposit yields.

  
  

Bottom Line

The CBUAE’s decision to hold its Base Rate at 4.40 percent implies that deposit rates are unlikely to change soon. To maximize returns on idle cash, UAE residents may explore higher-yield term offers, money-market vehicles, or alternative fixed-income products. It's wise to stay prepared to adjust strategies if and when the Base Rate shifts.

DISCLAIMER: The information provided is for general information purposes only and should not be considered as a financial advice. You should consult with a licensed financial advisor before making any investment decisions.