The Swiss National Bank (SNB) surprisingly lowered key interest rates. Another interest rate move could follow in June. What the decision means for savers, homeowners and tenants.
The SNB’s interest rate decisions have consequences for savers.
Imago
The Swiss National Bank (SNB) surprisingly lowered its key interest rate from 1.75 to 1.5 percent on Thursday. Until recently, it was unclear whether the SNB would take this step so early, although financial market players had expected interest rate cuts to occur soon. A majority of observers did not assume that the interest rate hike would take place now.
Market participants expect the SNB to cut interest rates
The interest rate cut was expected, but only later in the year. Indicators such as swap rates or bond yields showed even before the interest rate decision that financial market players expect the SNB’s key interest rate to be reduced to 1 percent by the end of the year, as Thomas Stucki, head of investment at St. Galler Kantonalbank (SGKB), says .
In this context, the economists at the major bank UBS pointed out that inflation in Switzerland has fallen more quickly than expected since the beginning of the year and, at 1.2 percent, is now well within the SNB’s target range of between 0 and 2 percent. Lower inflation has therefore created room for a reduction in the key interest rate.
Before the interest rate decision, UBS economists were convinced that a rate cut in June of this year was more likely than in March. They justified this by saying that the SNB was hardly ready to begin easing monetary policy until it had some certainty that the US Federal Reserve and the European Central Bank (ECB) would also soon begin cutting interest rates. According to market consensus, the Fed and the ECB are unlikely to lower their key interest rates before the second quarter.
Things turned out differently. With the unexpected interest rate move, the SNB may have paved the way for further monetary easing. Futures markets are already pricing in a further 25 basis point cut in the upcoming monetary policy assessment in June. The key interest rate could fall to 1 percent by the end of the year.
Not only economists, but also savers, homeowners, tenants and financial advisors are watching the SNB’s monetary policy decisions. Because the key interest rate has an impact on savings accounts, pillar 3a accounts, mortgages and also rents. What does the latest decision mean for mortgages and various investments – and what are the prospects if the SNB further reduces the key interest rate?
1. Festive mortgages
Stucki assumes that the swap rates will change little in the near future. Because the reductions in the SNB’s key interest rate were already “priced in” before the interest rate move, no major movements in fixed-rate mortgage rates are expected in the near future. These are strongly based on the key interest rates.
As the online comparison service Moneyland.ch announced on Wednesday, interest rates for fixed-rate mortgages are currently close to their annual high or even higher. The average interest rate on two-year fixed-rate mortgages as of Wednesday was 2.29 percent, the five-year rate was 2.23 percent and the 10-year rate was 2.33 percent. The interest rates for two-year mortgages are higher than ever this year, while those for five- and ten-year mortgages are close to their annual highs.
Nevertheless, the interest rates on fixed-rate mortgages are significantly lower than they were in autumn 2022. According to Florian Schubiger, co-founder of the comparison platform Kredite.ch, the rates on ten-year fixed-rate mortgages rose to an average of 3.2 percent at that time.
A special feature of the current situation is that the interest rates on two-year fixed-rate mortgages are, on average, lower than those on five-year mortgages. Financial experts talk about an inverted yield curve. Schubiger explains this by saying that market participants expect interest rates to fall.
This could mean that interest rates on longer-term fixed-rate mortgages will fall little or not at all, even if the SNB further cuts key interest rates. After all, this is already “priced in” on the market. Schubiger also recommends that mortgage borrowers definitely negotiate mortgage interest rates – many are not active enough and underestimate the opportunities available here.
2. Saron Mortgages
The interest rates on Saron mortgages have been higher than on fixed-rate mortgages for several months – making them less attractive. According to the comparison portal Moneyland.ch, the average interest rate for Saron mortgages was 2.59 percent in the middle of the week. The fact that the rates are higher than those for fixed-rate mortgages is historically an exceptional phenomenon.
Saron mortgages are money market mortgages. Their interest rates often fluctuate significantly as they react quickly to changes in the interest rate environment and to interest rate steps by the SNB. When interest rates rise, mortgage borrowers have to pay more – when they fall, it’s less.
Since the SNB has now cut key interest rates by 25 basis points, Saron mortgage interest rates will fall accordingly. Saron mortgages are therefore more attractive again for people who expect further interest rate cuts from the SNB. However, you should be financially flexible in case things turn out differently.
Depending on the negotiated margin, Saron mortgages could be cheaper again than fixed-rate mortgages in the event of a possible next interest rate cut. But there are also risks for borrowers. With Saron mortgages you don’t have any planning security like you do with fixed-rate mortgages.
3. Rent
The SNB’s monetary policy also has an indirect impact on rents in Switzerland – via the mortgage reference interest rate. The rents in current tenancies are based on this rate. It reflects the average interest rate on the domestic mortgage claims of banks in Switzerland.
The reference interest rate is collected quarterly and rounded to quarter percentage points. The Federal Housing Office (BWO) increased the reference interest rate for the first time in June 2023, from 1.25 to 1.5 percent. In December, the BWO announced a further increase to 1.75 percent. For tenancies that currently have a reference interest rate of 1.25 percent, an increase in rent of up to 10 percent is possible, according to UBS.
The bank also announced that further increases in the reference interest rate are unlikely in the current year due to the trend towards lower mortgage interest rates. However, a more immediate decline is not to be expected because the reference interest rate reacts with a time delay. According to an assessment by the Safra Sarasin bank, the reduction in the key interest rate is also an expression of the fact that the SNB does not expect a further increase in the reference interest rate.
4. Savings and fixed-term deposit accounts
Despite the higher interest rates, many bank savings accounts still offer very manageable interest rates. Schubiger criticizes the fact that many financial institutions have not passed on enough of the key interest rate increases of the last few months to their customers. This could also explain the record results of some domestic banks.
The SNB’s key interest rate cut could catch banks, which have recently significantly increased savings rates, on the wrong foot. If financial institutions had to reverse their interest rate increases after a short period of time, this would be bad for their reputation.
Schubiger advises savers to take a look at the fixed-term deposit offers. The money is tied up here for a period of time, for example one year or two years. There are higher interest rates for this period.
The interest rates on Pillar 3a accounts are generally better than on savings accounts. Here too, the comparison is worthwhile, as the conditions sometimes differ greatly.
5. Medium-term bonds
When it comes to medium-term bonds (KO), banks have reacted more strongly to higher interest rates in the past and adjusted the rates upwards. “Current bonds are more closely linked to swap rates, and the interest rates there are accrued much more quickly than with savings accounts,” says Stucki.