Interbank offered rates in the United Arab Emirates continued their slide to a new seven-year low on Thursday as liquidity in the country's banking sector remains high.

UAE bank deposits rose in April to their highest level in at least two years as the world's No.3 oil exporter enjoyed safe-haven status amid regional unrest.

However, UAE banks are still cautious about lending following Dubai's $25 billion debt restructuring last year and with the property sector still weak.     

"The dynamics are improving on the back of a real pick-up in deposits that have helped ease Eibor rates. There has been a fundamental improvement but a lot of this is already priced in," said Shady Shaher, Mena senior economist at Standard Chartered.

The benchmark three-month interbank offered rate, based on quotes from a dozen banks, was set at 1.585 percent at Thursday's central bank fixing, the lowest level since June 2004 and down from Wednesday's 1.589 percent. 

The rate was 1.915 percent before Dubai's debt crisis in November 2009 and peaked at around 2.362 in July 2010. It still remains far above the Saudi benchmark of 0.645 percent.

Deposits at UAE banks stood at 1.128 trillion dirhams ($307.1 billion) in April, up 2.1 percent from the previous month and 7.5 percent from December, when a wave of political unrest started to sweep across the Arab world.

The UAE central bank has urged banks to bring rates down and increase lending after September's debt restructuring deal with Dubai World.

"It is still going to be a while before we see a pick-up in lending," said Simon Williams, chief economist for Middle East and North Africa at HSBC Bank in Dubai. "There is scope for them (EIBOR rates) to fall further," he said.

UAE private sector credit growth has been anaemic, at a mere 2.0 percent in February, compared to annual rates of well over 50 percent in the oil-boom year of 2008.

"There is still a big disparity between some of the banks in the EIBORs ... Some of the banks are at least 80 to 100 points higher than other banks," a trader at a UAE bank said.

"They drop it on a gradual basis of one or two points a day to make it look a bit more pretty," he said. The UAE has escaped public protests that challenged authorities in nearby Bahrain, Oman and Yemen. It has pledged to spend $1.6 billion in its less-developed northern emirates, introduced bread and rice subsidies and hiked military pensions, among other measures.

Dubai's credit default swaps, the cost of insuring the emirate's debt against default for five years, stood at 347 basis points on Thursday, up from 323 points earlier this month, which was the lowest level since November 2009, according to Markit. -Reuters