The UAE’s central bank announced on Wednesday it is increasing its base rate by 50 basis points to 2.25%, coming into effect on Thursday.

This follows on from the U.S. Federal Reserve increasing rates on Wednesday by half a percentage point, the largest rise since 2000, as it seeks to cool red-hot inflation.

The Central Bank of the United Arab Emirates also decided to hold the rate applicable to borrowing short-term liquidity from the regulator via all standing credit facilities at 50 bps above the base rate, Reuters reports.

Other Gulf central banks increased their main interest rates on Wednesday, with the central banks of Saudi Arabia, Qatar and Bahrain raising their key rates by 50 basis points.

In addition, the International Monetary Fund forecasts MENA inflation will hit 13.9% this year, just under the 14.8% 2021 figure, bolstered by a considerable rise in food and energy prices.

Banks in the UAE are likely to benefit from the rate hike. Lenders’ net income is forecast to move up 15%, whilst return on assets is set to rise 1.4% for every 100 bps increase in interest rates, according to S&P Global Ratings.

Yet despite the rate rise, lending growth will likely accelerate, the ratings agency added, boosted by the UAE’s economic growth.

However, according to Abu Dhabi Islamic Bank's group chief financial officer, Mohamed Abdelbary, with between seven and nine rate hikes forecast in 2022 and 2023, borrowing may tighten over the long-term: “There is demand and financing will happen, but as rates also go up, you will start seeing that some clients may be [holding] back from availing financing,” he said.