Lunate Forecasts Elevated Interest Rates Until 2027, Impacting UAE Economy

Global interest rates are set to stay elevated well into 2027, driven by robust nominal economic growth rather than an impending downturn, according to the latest economic outlook from Abu Dhabi-based investment firm Lunate. The report, titled “Even Higher for Even Longer,” suggests the global economy has entered a new phase characterized by higher inflation, wages, investment spending, and growth compared to the post-global financial crisis era of ultra-low rates.

Implications for the UAE

For the UAE, which pegs its dirham to the US dollar, decisions by the US Federal Reserve directly influence local borrowing costs for businesses, property developers, and consumers. Lunate anticipates the Fed will implement one more 25-basis-point rate hike, pushing the rate to 4.25%, which is expected to be the peak of the current hiking cycle. Rate cuts are not foreseen until late 2027 at the earliest.

Crucially, Lunate views these higher rates as a reflection of economic strength, not weakness. The firm highlights that borrowing costs are rising because economic activity remains robust, suggesting an extended economic cycle rather than a slowdown. This environment could benefit the UAE, particularly through elevated oil prices — Brent crude has risen over 44% year-to-date, supporting government spending, infrastructure investment, and liquidity across Gulf economies.

Factors Driving Higher Rates and Growth

Three key factors are identified as contributing to persistent inflation and elevated rates:

• Persistent wage growth
• Renewed escalation in the Middle East, keeping oil prices high
• A hot capital expenditure investment cycle

The report forecasts global nominal GDP growth to exceed 5% over the next four quarters, with US 10-year Treasury yields remaining above 4.5%.

Impact on the UAE Property Market

The outlook for the UAE property market is nuanced. While higher borrowing costs typically affect mortgage affordability and financing, these pressures could be mitigated by sustained population growth, strong investor demand, and overall economic expansion. Lunate stresses that higher rates driven by stronger economic growth represent a healthier scenario than rates solely driven by inflation. This environment also presents opportunities for Gulf sovereign wealth funds and private credit investors, as floating-rate loans common in private credit tend to perform well during hiking cycles.