Borrowing costs are set to rise in the UAE and other Gulf countries this week as the U.S. Federal Reserve is forecast to increase rates by another 75 basis points.

Following the Fed’s rate hike in July, the UAE increased the base rate applicable to the overnight deposit facility by 75 basis points, Khaleej Times reports.

In the wake of the stronger-than-forecast inflation data on Tuesday, the Fed will increase the Fed Funds target rate by 75 basis points to 3.25-3.50% at the meeting on Wednesday, says economist for the Middle East and North Africa at Capital Economics, James Swanston.

“Gulf central banks, by virtue of their dollar pegs, will follow suit. The so-called ‘impossible trinity’ means that, because of the commitment to fixed exchange rates and the free movement of capital across borders, interest rates in the Gulf must follow those in the U.S. Further ahead, we think the Fed will tighten policy by at least a further 75bp by year-end, but as we’ve noted before, oil prices rather than interest rates tend to be the main driver of credit growth in the Gulf,” Swanston stated.

“We also hold a non-consensus view that the Central Bank of Egypt will resume its tightening cycle,” he added.

Furthermore, according to Edward Bell, senior director for market economics, Emirates NBD Research, a 75-basis point increase this week is almost certain, as well as another one at the meeting in November.

“For now, we will hold our view that the Fed hikes by 50 bps in November and December though the risks are overwhelmingly on the upside given how sticky inflation appears to be and how relatively robustly the economy is performing. We also project at least two 25 bps hikes in 2023 which would bring the Fed Funds rate up to 4.75% by the mid-point of next year at which point they will likely pause before considering any easing in policy,” stated Bell.