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The Swiss National Bank SNB on the Bundesplatz in Bern. Image: keystone

26.09.2024, 09:3126.09.2024, 13:46

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What was decided?

The SNB announced on Thursday morning that it would raise the SNB key interest rate by 0,25 Percentage points to 1.00 percent The interest rate change will take effect tomorrow, September 27, 2024.

The SNB had already lowered the key interest rate by one rate step (0.25 points) in March and June of this year. This came as a great surprise in March, as the SNB was one of the first major central banks in the world to lower the key interest rate.

Does the decision come as a surprise?

No, this interest rate move was expected by most analysts and experts. This was not least due to the US Federal Reserve, which surprised the markets last Wednesday and heralded its interest rate turnaround with a major cut of 50 basis points.

Why is the SNB lowering the key interest rate again?

Inflationary pressure in Switzerland has again fallen significantly compared to the previous quarter, the SNB said in a communiqué on Thursday. By lowering the SNB key interest rate, it is taking lower inflationary pressures into account.

According to the SNB, price stability, i.e. inflation of 0 to a maximum of 2 percent, is guaranteed with the key interest rate reduced to 1.00 percent. In its latest forecast, it assumes that inflation will average 1.2 percent in 2024.

Values of only 0.6 and 0.7 percent are expected for 2025 and 2026. A value of more than 1 percent is not estimated for any quarter in the forecast period from 2025 onwards.

The SNB has thus significantly lowered its forecasts compared to the last assessment in June. At that time, with a key interest rate of 1.25 percent, it had predicted annual averages of 1.3 percent for 2024, 1.1 percent for 2025 and 1.0 percent for 2026.

Further interest rate cuts may be necessary in the coming quarters to ensure price stability in the medium term. At the same time, the SNB remains prepared to be active in the foreign exchange market if necessary.

Are rents falling now?

Rents in Switzerland are based on the so-called reference interest rate. This is an average of all interest paid on mortgages in Switzerland. These, in turn, are based on the SNB’s key interest rate.

However, a change in rents after an interest rate reduction or increase does not happen immediately; the reference interest rate is considered a “slow tanker”. The reason: Since long-term fixed-rate mortgages are also included in the calculation, the reference interest rate behaves sluggishly and it takes time for it to rise or fall.

The reference interest rate is adjusted four times a year. It is currently 1.75 percent and has been since December 2023. The next date on which it could be adjusted is December 2, 2024.

The fact is: As of June 30, the average interest rate for all domestic mortgages was only 1.67 percent. If this falls to 1.63 percent, the figure would be rounded down and the reference interest rate would fall to 1.5 percent. And then tenants could demand a reduction in rent.

So what does Thursday’s interest rate move mean? Normally it should increase the pressure on the reference interest rate. However, many experts still assume that this step is not enough. The reason: The market had already expected the reduction early on. This means that the new interest rate has already been factored into mortgages and will therefore no longer have a major effect on newly concluded mortgages.

Nevertheless, forecasts for the reference interest rate are subject to extreme uncertainty. And there are indeed some experts, even if they are in the minority, who are predicting a reduction in this rate after the reduction in the SNB key interest rate on Thursday. already consider possible in December.

Rent reduction in Switzerland

There is no legal provision for an automatic adjustment of rents due to a change in interest rates. Some landlords grant rent reductions automatically. However, tenants usually have to submit a request for a rent reduction to the property management company. The landlord is then obliged to respond to the request.

The right to a rent reduction can also be claimed retrospectively – long-term tenants who have never applied for a rent reduction and have never received one can also claim previous changes in the mortgage reference interest rate. However, the law does not provide for a refund of overpaid rent.

What are the fundamental effects of a reduction in key interest rates…

… for savers and investors?

For people who save and/or invest their money, falling interest rates are bad news: they receive lower interest rates for depositing their savings.

… for homeowners?

In principle, lower base rates lower all interest rates. This is no different for mortgage interest rates – i.e. the interest on which mortgage loans must be paid – although it depends on the type of mortgage. For example, interest rates on longer-term mortgages react differently than those with a shorter term.

Saron mortgages, for example, will immediately benefit from further interest rate cuts by the SNB. For fixed-rate mortgages, however, the downside potential is small. For these, it is more important which long-term scenarios market participants assume.

Saron interest rate

The Saron (Swiss Average Rate Overnight) is a daily interest rate. It is used for loans that the Swiss National Bank and commercial banks grant to each other against collateral. Those who choose a Saron mortgage can benefit more quickly from low money market interest rates. When interest rates fall, you tend to pay less than with fixed-rate mortgages, but when interest rates rise, you pay more.

It is important to note, however, that not all homeowners or potential buyers are affected in the same way or at the same time. Long-term fixed-rate mortgages, for example, will only be adjusted to the new interest rates when they expire and are then renewed.

… on the stock markets?

Unlike those who keep their money in a savings account, lower interest rates are good news for those who invest in stocks. When interest rates on savings fall, investors may choose to put their money back into stocks because they may now earn more money from them than from saving.

Lower interest rates are also usually a sign of relaxation. This means that capital becomes cheaper again and private individuals and companies invest more. This can lead to confidence in company growth increasing again, meaning that more shares will be bought and their prices will rise.

In short: if the key interest rates fall, the stock market indices rise and vice versa. The two variables usually behave in opposite directions to each other.

… on the Swiss franc exchange rate?

A reduction in the base interest rate devalues the corresponding currency. The reason: because it is cheaper, banks borrow more money from the central bank. This increases the amount of money in circulation. And if money becomes less scarce, its price, or the value of a currency, falls.

If the SNB lowers the key interest rate, the franc is likely to depreciate against other currencies, thus reducing the pressure on the Swiss currency somewhat. However, in the long term it will also depend on whether and how much the central banks of other currencies lower their key interest rates in comparison.