Emirates NBD bank sees home loans jump as rates fall

By Daliah Merzaban

DUBAI, Feb 18 (Reuters) - Emirates NBD ENBD.DU, the Gulf's largest bank, expects to almost double its mortgage lending this year as lower interest rates encourage home buyers. That could fuel inflation already at a 19-year high.

Lenders in United Arab Emirates, one of five Gulf oil producers that peg their currencies to the dollar, are lowering interest rates for homes loans as the central bank mirrors cuts in the United States.

Mortgage lending in the second-largest Arab economy, which opened its market to foreign investment in 2002, almost doubled in the year to September to 43.68 billion dirhams ($11.90 billion), central bank data showed on Monday. The United States started cutting rates on Sept. 18.

"Mortgage loan customers are definitely seeing the benefit of lower interest rates," Suvo Sarkar, Emirates NBD's general manager for retail banking, told Reuters on Monday.

The bank posted an 80 percent surge in outstanding mortgages to 3 billion dirhams last year and would "maintain" that growth this year, Sarkar said.

The U.S. Federal Reserve has slashed its benchmark rate by 225 basis points in five moves since Sept. 18 to 3 percent. The UAE central bank's benchmark repurchase rate is also 3 percent.

Emirates NBD sets mortgage rates at 3 to 4 percentage points above the six-month Emirates Interbank Offered Rate (EIBOR), which was 2.83 percent according to the average of seven UAE lenders on Monday.

"You see a lowering of mortgage rates in the market with EIBOR rates ... this makes a difference for investors," Sarkar said.

Like its Gulf Arab neighbours, the UAE has been constrained in its fight against inflation by its dollar peg, which forces it to track U.S. monetary policy even though its economy is surging on a near five-fold increase in oil prices since 2002.

Inflation soared to a 19-year-high of 9.3 percent in 2006, the latest available figure, and probably accelerated to 10.1 percent last year, a Reuters poll showed in December.

"With lower interest rates you should see an increase in borrowing," said Caroline Grady, a regional economist at Deutsche Bank. "This should increase inflationary pressures because supply-side constraints will push up prices."

NEGATIVE INTEREST RATES

Inflation has overtaken official lending rates in the UAE, making it cheaper for people to borrow than to keep money on deposit, encouraging investment in real estate, the main driver of the surging cost of living across the Gulf.

"A buyer's capability to actually repay a mortgage is going to increase with interest rates falling," said Murray Sims, head of personal banking at National Bank of Ras al-Khaimah RAKB.AD (RAK Bank), a UAE lender that focuses mainly on retail banking.

This year, RAK Bank -- which has about 2.5 billion dirhams in outstanding mortgages -- reduced its mortgage rates by between 25 and 50 basis points to between 7.75 and 8.25 percent, Sims said.

"As the U.S. Fed continues to reduce rates, we will pass that on where appropriate," Sims said.

Looking to curb price rises this year, Abu Dhabi and Dubai -- the two largest members of the UAE federation -- lowered the maximum increase landlords can charge their tenants to 5 from 7 percent.

Appetite for UAE dirham-denominated assets has gained momentum since UAE Central Bank Governor Sultan Nasser al-Suweidi said in November he was under mounting pressure to drop the peg and track a currency basket.

That raised expectations the UAE might allow its currency to appreciate, and made property and stock market investments in the UAE more appealing.

Though Suweidi has since dropped his calls for change, investors still bet the dirham will rise 2.4 percent in a year and 3.8 percent in two years, forward rates show AEDF=.

(Editing by Jason Neely)