The Gulf economies are well positioned to absorb the impact of the US Federal Reserve's decision to keep interest rates at elevated levels, supported by strong government finances, higher oil prices, and continued momentum in economic diversification programs and infrastructure investment.
While the peg of most Gulf currencies to the US dollar requires monetary policy in the region to move broadly in line with Washington, strong oil revenues and sustained investment spending provide room to contain the pressure of elevated financing costs.
Experts who spoke to Asharq Al-Awsat said the Federal Reserve's decision to keep interest rates unchanged at 3.50% to 3.75% provides Gulf economies with greater stability and clarity regarding financing costs, despite continued pressure on the sectors most sensitive to interest rates, particularly real estate, construction, and retail. At the same time, higher oil prices support public finances, while banks and depositors benefit from higher returns, strengthening the region's ability to cope with the continuation of tight US monetary policy.
Monetary Stability
Hamza Dweik, Head of Trading for the Middle East and North Africa at Saxo Bank, said the Federal Reserve's decision to leave interest rates unchanged at 3.50% to 3.75% provides a degree of stability for Gulf economies, particularly given that most Gulf currencies are pegged to the US dollar.
Accordingly, Dweik expects Gulf central banks to maintain their current monetary policy stance to preserve alignment with US policy.
Although elevated financing costs continue to weigh on credit growth and interest rate sensitive sectors such as real estate and discretionary spending, Dweik believes Gulf economies remain in a relatively strong position, supported by solid government balance sheets, continued momentum in economic diversification programs, and ongoing infrastructure investment.
In the banking sector, he expects regional banks to continue benefiting from relatively high net interest margins as long as interest rates remain elevated.
High Financing Costs
Madhur Kakar, Founder and CEO of Elevate Financial Services, said the Federal Reserve's decision directly affects Gulf monetary policy through the region's currency pegs to the US dollar.
He noted that the Central Bank of the UAE kept its base rate unchanged at 3.65%, while the central banks of Qatar and Bahrain followed the same approach. Saudi Arabia also maintained its repo rate at 4.25%.
Kakar said the real significance of the decision lies not in holding rates steady itself, but in the underlying balance of risks. Three members of the Federal Open Market Committee voted in favor of raising interest rates, reflecting a division within the Fed that leans toward tighter monetary policy, while futures markets have priced in a higher probability of additional tightening before the end of the year.
"For the Gulf, this means the era of waiting for cheap money is over for 2026," he said, adding that financing costs will remain elevated for interest rate sensitive sectors such as real estate, construction, and retail.
However, Kakar also pointed to a positive factor, noting that Brent crude prices rose by more than 20% during July, making current interest rate levels beneficial in containing imported inflation while preserving the attractiveness of returns on Gulf deposits and sukuk.
Neutral Impact
Vijay Valecha, Chief Investment Officer at Century Financial, believes the Federal Reserve's decision has an overall balanced, or largely neutral, effect on Gulf economies, with a slight positive bias in the near term.
He said markets had been pricing in the possibility of one to three rate cuts, meaning the decision to leave rates unchanged effectively removed concerns about an immediate increase in borrowing costs for regional borrowers, an especially important factor for small and medium-sized enterprises as well as mid-sized companies.
He added that certainty regarding the direction of financing costs plays a greater role in guiding capital expenditure, working capital, and capital raising decisions than the absolute level of interest rates.
Because the Saudi riyal, UAE dirham, Bahraini dinar, and Qatari riyal are pegged to the US dollar, Gulf central banks moved in parallel. Valecha noted that the Central Bank of the UAE kept its benchmark rate at 3.65%, while the Saudi Central Bank (SAMA) maintained its repo rate at 4.25%.
He added that benchmark interbank rates such as EIBOR and SAIBOR have remained at levels borrowers have already adapted to over five consecutive policy meetings, limiting the marginal impact of the latest decision.
On the fiscal side, Valecha said higher oil prices, combined with geopolitical tensions in the Middle East, the same factors prompting the Federal Reserve to remain cautious, continue to support Gulf budgets and hydrocarbon revenues.
According to Valecha, banks benefit from wider net interest margins, while corporate treasury departments and retail depositors continue to earn attractive returns on dirham- and riyal-denominated deposits.
Potential drawbacks, however, are emerging for sovereign borrowers and major corporations. Yields on 30-year US Treasury bonds have climbed above 5.2%, increasing the cost of pricing US dollar-denominated sukuk and bond issuances for major regional issuers. With the September meeting still leaving open the possibility of another rate increase, Valecha said the current period of stability should not be viewed as permanent.
Oil and the Dollar
Looking ahead, Dweik said geopolitical developments and supply conditions will remain the primary drivers of Brent crude rather than any direct effect from the Federal Reserve's decision.
He noted that the US central bank itself identified energy supply shocks and geopolitical tensions in the Middle East as factors fueling inflation, underscoring the importance of crude prices in shaping the global economic outlook. For Gulf economies, stable and resilient oil markets remain a key safeguard for fiscal stability and government spending plans.
Kakar agreed that geopolitical factors will continue to be the main driver of oil markets, with tensions between the United States and Iran and developments surrounding the Strait of Hormuz shaping market dynamics. The impact of higher interest rates for longer, he said, will mainly be to limit gains by weakening demand expectations.
Valecha likewise expects oil prices to remain positive in the short term, driven more by geopolitical developments than monetary policy. He noted that Brent and West Texas Intermediate crude both jumped more than 7% following the latest escalation in the Middle East, highlighting that supply disruption concerns continue to outweigh worries about demand.
He added that higher energy prices could keep global inflation elevated, reducing the likelihood of near-term US interest rate cuts.
Gold and Metals
In currency markets, the experts expect steady interest rates to support the strength and stability of the US dollar as expectations for monetary easing decline, reinforcing the stability of Gulf currencies pegged to it. The impact is expected to be more pronounced in financing costs and market sentiment than in exchange rate movements. Persistently high US yields may also continue attracting capital flows into dollar-denominated assets.
Gold faces mixed forces. Higher interest rates and a stronger dollar weigh on the non-yielding metal, while geopolitical tensions, inflation concerns, and central bank purchases continue to support safe haven demand.
The experts expect gold to remain highly sensitive to inflation data and developments in the Middle East, with the potential for additional pressure if expectations for tighter monetary policy increase.
For industrial metals, copper and aluminum are expected to remain tied to global growth prospects. Continued economic activity supports demand, but elevated interest rates raise financing costs and weigh on cyclical industrial sectors. At the same time, the medium-term outlook remains supported by structural demand driven by electrification projects, renewable energy, and artificial intelligence infrastructure.
