The UAE central bank has decided to commence publishing a new benchmark interest rate for interbank lending in the first half of September.

Earlier this month, concerned by stubbornly high interbank rates - also known as Emirates Interbank Offered Rate, or Eibor - the central bank had revealed that it was in discussions with local banks to set up a new mechanism in order to determine a reference point for the short-term interest rates at which banks borrow from each other.

Presently, Eibor is calculated on the basis of inputs from 10 local and foreign banks, which are active in the interbank market.

The sources informed that the purpose of the move was to make sure that the offered rates were a fair representation of the prevailing market conditions.

The sources further informed that the interbank rates are a widely followed benchmark and its movements have widespread ramifications for both individual and corporate borrowers.

Many of the mortgages and corporate bonds are connected to the interbank rate and interest payments are periodically adjusted to reflect the changes in Eibor.

Since the central bank made its intention clear, the interbank rates have been moving lower. The one-month interbank rate stood at 1.83 per cent on Wednesday, plunged by 20 basis points, or 10 per cent from August 4.

However, the Eibor is still substantially higher than the rate at which banks can borrow from the central bank. Central bank's policy rate called the repurchase rate, or Repo, presently stands at one per cent.

In another move that could bring short-term interest rate substantially lower, the central bank has extended the tenure of loans it issues against the certificate of deposits held by the banks.

From Wednesday, the banks will be allowed to pledge the certificate of deposits to raise money for one-month at the current repurchase rate of one per cent.
 Previously, banks were only allowed to borrow money for one week.