Navigating the World of Interest Rates: Market Analysis, Earning Potential, and Current Outlook
Damian Hitchen CEO, Saxo Bank MENA
Rising interest rates are a double-edged sword. Ask the risk-averse pensioner who puts his life savings in government bonds for meeting his day-to-day expenses, and he will gleefully rejoice. The reaction of a new couple who have just entered a floating or variable rate mortgage will be quite the opposite.
The Dual Nature of Rising Interest Rates
In the uncertain world of today, with talks of recession, impending doom in asset prices, and skyrocketing inflation that is only recently beginning to be tamed, finding a viable and safe investment can be tricky. Stocks always carry an element of risk and volatility (ask Silicon Valley Bank’s investors), and real estate is not handy especially when you need funds for an emergency (real estate assets are illiquid). Earning a material, safe return on one’s funds is thus not a bad proposition. Who does not want to preserve the purchasing power of one’s funds given the return of positive real interest rates?
Seeking Safe Investments in an Uncertain World
And thankfully for those interested, real returns are here to stay. According to recent statements from U.S. central bankers, there is a clear indication that interest rates are expected to remain at elevated levels or potentially increase further. Since the UAE and most Gulf economies are linked directly with the US Dollar, interest rates are expected to follow a similar trend here. This presents an opportunity for individuals in the UAE to explore the best online trading platform for returns on cash deposits and investing in bonds.
The Appeal of Positive Interest Rates
For example, in the UAE, on each of the recent US Fed funds rate increases, the Central Bank of the UAE has followed suit within hours of each Fed rate movement. Hence the cost of borrowing for UAE-based residents has increased in the same way as for US residents. On the flip side, both local and International banks are now paying better rates of deposit interest – for example, with us, clients can currently earn up to 4.30% p.a. in US Dollars on their free cash – this is accrued daily, and has no penalty for when clients either want to deploy into the markets or take cash back. Most UAE and Gulf banks offer interest rates via Term or Fixed deposits, which often involve a minimum lock-in period, and some form of penalty if a client wishes to access those funds before the end of the term. For clients who are on fixed-term loans, and now have surplus cash to deposit, Saxo’s daily accrual, no lock-in interest rates are potentially a nice place to be.
The Prospect of Elevated Real Interest Rates
Inflation, on the other hand, is finally slowing down. Economists echoed the Central Bank’s projection, saying cost rises will be one of the lowest in the region. The UAE Central Bank has projected that inflation in the country will decelerate to 3.2 percent due to softer price increases in all categories, especially transport and food and beverages. “Imported inflation is expected to be modest owing to the disinflation trend worldwide, while rents and wages are also expected to contribute moderately. In 2024, inflation is projected to slow further at 2.8 percent, in line with global trends,” the Central Bank said.
Important of looking beyond just a high interest rate
Recent debacles in the US financial system, such as those related to Silicon Valley Bank, Silvergate Bank, and Signature Bank, make one question financial institutions’ credibility. Hence in a world of changing interest rates, it is imperative that investors seek opportunities to optimize cash holdings not purely based on the deposit interest rate a Bank/Firm can offer but also taking into consideration the safety and credibility of the institution. In addition to Saxo’s Innovative deposit solutions, which provide competitive interest rates and the freedom to access funds as needed, Saxo is also an investment grade rated Bank *1, we are entrusted with over USD$100 billion in client assets and have recently attained the designation of a SIFI (Systemically Important Financial Institution) by the Danish Financial Supervisory Authority (FSA). By capitalizing on these opportunities with a credible and trusted European-regulated Bank, sophisticated investors can generate returns while navigating dynamic markets and evolving interest rate environments.
Last Updated on 1 year by News Desk 2
