How the dirham's dollar peg sets UAE interest rates

On Wednesday evening, a committee of American officials will sit down in Washington and, in effect, set the price of money in Abu Dhabi. Nobody here votes. Nobody here is asked. The decision arrives in your bank account regardless, and it is worth understanding why.

The mechanism is the peg. Since November 1997 the dirham has been fixed at 3.6725 to the US dollar, and a fixed exchange rate carries a price: you give up control of your own interest rate. If money could reliably earn more in dollars than in dirhams, it would leave. So the link is made explicit — the UAE base rate is anchored to the Federal Reserve's rate on reserve balances, and provides what is described as an effective floor under overnight money-market rates here. The 3.65% it sits at today is a number shaped by American conditions rather than local ones.

That floor sits under the shortest dirham money banks lend one another. Rates for longer stretches — a month, three months — normally sit above it and move with it, and those are what the central bank publishes each day as EIBOR, the rate UAE banks lend to each other at. EIBOR is the usual reference for a variable-rate home loan here: lenders add a fixed margin to it to arrive at the rate you actually pay. A quarter-point decided in Washington works its way down that chain to your outstanding balance, arriving at whatever reset date your loan specifies.

It reaches your savings by the same road, though not automatically. Deposits and fixed terms are priced off the same money-market rates, but how much of any move a bank passes on is its own decision — which is a reason the rate on a savings account here is worth knowing rather than assuming.

What this really changes is where you look. UAE inflation, the oil price and the local property market are all real and all consequential, and none of them sets your mortgage rate. American wages and American inflation do. It is a strange thing to get used to — that the most important economic news for your monthly outgoings concerns another country's economy, reported in another hemisphere. But it is the bargain the peg strikes, and what it buys in return is that the currency you are paid in has not moved against the dollar in nearly thirty years.