The central bank of the United Arab Emirates (UAE) has decided to lower the base interest rate for overnight deposits by 25 basis points, from 4.15 percent to 3.90 percent. This will make loans cheaper in the Gulf region following the Fed's interest rate setting.

Other Arab oil states on the Gulf, such as Saudi Arabia, also followed the Fed.

On Wednesday, the U.S. central bank cut the federal funds rate — the U.S. benchmark interest rate — by a quarter of a percentage point for the second time this year. The new range now lies between 3.75 percent and 4 percent.

Late on Wednesday, October 29, 2025, the Saudi Arabian central bank lowered its key interest rate (repo rate) by 25 basis points to 4.5 percent — the lowest level in almost three years.

This decision was in line with market expectations and aimed to maintain the interest rate differential with the U.S. Federal Reserve in order to secure capital flows and stabilize the exchange rate regime.

Inflation dilemma

All Gulf states (with the exception of Kuwait) have pegged their currencies to the greenback at fixed exchange rates, since their main export commodity — crude oil — is largely priced and traded in dollars. For example, one dollar always equals 3.677 UAE dirhams.

The Fed’s decisions matched market expectations, even though the U.S. labor market is weakening while inflation remains at 3 percent — above the 2 percent target.

For the Gulf states, however, the IMF expects a moderate increase in inflation in 2025 and 2026 to 2 percent, up from 1.7 percent in 2024. According to Carla Slim, Chief Economist for the Middle East and Pakistan at Standard Chartered Bank in Dubai, the higher inflation caused by U.S. tariffs poses no threat to the Gulf states, because subdued growth in East Asia offsets U.S. inflation at the global level.