SNB interest rate decision
The Swiss National Bank announced at today's press conference in Zurich that for now, it will not further increase its policy interest rate. The monetary policy, which has been significantly tightened over the past quarters, is now acting to counter the persistent inflationary pressure. However, the SNB will closely monitor the further development of inflation in the coming months and will not hesitate to take further action to ensure price stability in the medium term. To maintain appropriate monetary conditions, the National Bank is also prepared to be active in the foreign exchange market, with a focus on selling foreign currency.
Source: Swiss National Bank.
Inflation is declining, but for how long?
According to the Swiss National Bank's monetary policy, price stability is achieved when inflation falls within 0 to 2 percent. This target was recently met again: after inflation in Switzerland was as high as 3.4 percent in February, it has steadily decreased since, reaching 1.6 percent in August 2023, the same as in July. The SNB’s decision is therefore understandable from today's perspective. However, forecasts were clear: The SNB will not hesitate to further increase the interest rates if inflationary pressure requires it.
While prices for imported goods have indeed normalised, partly thanks to a strong Swiss Franc, domestic goods remain more expensive than they were a year ago. Additionally, some of the declining inflation can be attributed to so-called base effects: if specific goods or services in Switzerland were exceptionally expensive in the previous year, and their prices have since returned to normal, the unadjusted inflation rates for the following year will appear too low. Most notably, this was the case with oil prices in the aftermath of the Russian-Ukrainean war. As these base effects drop out of the statistics, inflation will start to rise again.
Furthermore, there are new inflationary challenges to consider. A first wave of rent increases is expected by the end of 2023, and in the new year, health insurance contributions and electricity prices are set to rise significantly. Housing costs, energy, and healthcare account for more than 40 percent of average household expenditures and will thus have a notable impact on overall inflation. However, the SNB’s longer-term inflation forecasts are cautiously optimistic at 2.2% for 2023 and 1.9% for 2024 – assuming that there won't be an energy shortage with large-scale production losses during the winter.
Economic outlook has worsened
Growth, inflation, and policy rates:When inflation rises, central banks increase their policy rates, making loans more expensive. This reduces the amount of money in circulation and lowers demand. While this leads to lower prices, it also slows down economic growth.
After a solid first half of 2023, sentiment in the Swiss market has recently taken a turn for the worse. For 2023, the expert group on business cycles of the Swiss government has forecasted significantly below-average growth of 1.1%, while the SNB’s recent forecast has growth at around 1.0% in 2023. There are several contributing factors: Although inflation and the SNB’s interest rate hikes remain low by international standards, the Swiss economy is slowly beginning to feel the effects of the restrictive monetary policy. The strong Swiss Franc and below-average demand will also weaken exports. And lastly, domestic inflation is still a concern. As mentioned, rising rental prices, healthcare costs, and electricity prices will further strain the wallets of Swiss consumers in the coming year, dampening consumption. A recovery of the economy with an expected growth rate of 1.5% is currently projected for 2024.
How have current interest rates affected the real estate market?
The challenging economic situation and the SNB’s tight monetary policy over the last 15 months have left their mark on the real estate market. As a result of the Ukraine conflict and inflationary pressures, fixed-rate mortgage interest rates increased by more than 1.5% in the first half of 2022. This suddenly made tracker mortgages (SARON) much cheaper by comparison. However, as the SNB began raising its policy rate, the difference between the two has continuously been growing smaller, and switching to a fixed-rate mortgage has now become the preferred option again for many homeowners with a SARON mortgage.
The higher mortgage interest rates are felt in particular by homebuyers. While it was possible to secure a fixed-rate mortgage below 1% just two years ago, rates have since doubled or even tripled. And while the affordability criteria for mortgages have remained unchanged, it’s understandable that some buyers will be reconsidering whether they can or want to become homeowners given the current interest rate environment. As expected, demand for homes has decreased, impacting the price dynamics. While property prices are still on the rise in many places, the rate of increase has slowed down.
For existing homeowners, the impact of interest rate increases varies depending on their mortgage product. Homeowners with a tracker mortgage are directly affected by changes in the policy rate, as SARON closely tracks the SNB policy rate. However, the majority of property owners will only feel the increase in interest rates when the time has come to renew their mortgage, as fixed-rate mortgages are by far the most common type of mortgage in Switzerland.
Source: Swiss National Bank.SARON rates are based on the base interest rate plus a typical margin of 1%. The base interest rate can never be lower than 0%.
ECB and Fed: Switzerland remains relatively unscathed
Even though the economy and the population have certainly felt the effects of inflation and rising interest rates, looking abroad reveals how once again, Switzerland has gotten off lightly. By comparison: the European Central Bank deemed it necessary to raise its key interest rate from 0% to 4.5% in just over a year to combat soaring inflation in the eurozone of up to 10%. A comparable trend was seen in the United States: between March 2022 and May 2023, the US Federal Reserve had to raise its key interest rate a total of ten times in order to combat the highest inflation rate since the early 1980s.
However, in both countries, as well as in the Eurozone, there are signs that the end of the interest rate cycle is slowly but surely approaching. The Fed has recently refrained from further adjusting its key interest rate, and most experts believe that the peak in interest rates may have been reached in both the Eurozone and the United Kingdom as well.
But why were inflation and the associated interest rate hikes so much higher abroad when compared to Switzerland? This can be attributed to several factors: In times of crisis, the SNB can allow the Swiss Franc to appreciate to make imports cheaper, thus mitigating the impact of imported inflation. Additionally, in comparison to countries like Germany, Switzerland is much less dependent on gas and oil. Lastly, there are strong protectionist agricultural policies in place in Switzerland, which stabilise food prices by means of variable import duties. As a result, when compared to many other countries, price levels in Switzerland are less tied to fluctuations in international markets.
Summary and outlook
- The SNB has left its policy rate at 1,75% as per 21.9.2023. The next interest rate decision will follow on December 14th.
- Inflation has decreased since the beginning of 2023 but is expected to rise again towards the end of the year. Forecasts are subject to a lot of uncertainty.
- Spiking interest rates have led to a reduced demand for real estate. This has served to partially counteract the price trend of the past couple of years. Therefore, we are seeing a lower transaction count, but also reduced competition among sellers.
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