It was not a question of ‘’ if ‘’, but rather ‘’ how high ‘’. For the fourth time in a row this year, the Swiss National Bank (SNB) has lowered the key interest rate: this time by a remarkable 50 basis points — from 1.0 to 0.5 per cent. This is the largest reduction in almost ten years. This puts the SNB's key interest rate at its lowest level since November 2022.
The strong measure surprised many. The news agency Reuters had asked 31 experts from the economy and the financial sector for their assessment beforehand. A full majority of 27 respondents — i.e. over 85 per cent — had expected the central bank to cut the key interest rate by 25 basis points to 0.75 per cent. Only four respondents expected a stronger move of 0.5 per cent. This is precisely the step that the SNB has now taken.
The reduction in the key interest rate will take effect from 13 December and was announced for the first time under the leadership of the new SNB Chairman Martin Schlegel. He is thus sending out a signal of transparency, self-confidence, and strength at his debut.
One of the SNB's primary objectives is price stability, combined with the creation of a monetary policy environment in which the Swiss economy can develop appropriately. Inflationary pressure, which serves as a key factor for the SNB in setting the key interest rate, has decreased again this quarter. Inflation has once again been lower than expected since the last assessment of the situation. It fell from 1.1 per cent in August to 0.7 per cent in November. Both the prices of goods and services contributed to this decline. In the short term, the inflation forecast is below that of September. Oil products and food in particular have become more expensive than expected. In the medium term, this low level of inflation should remain virtually unchanged thanks to the recent interest rate cut. Inflationary pressure abroad should also ease over the next few quarters, and the global economy should continue to grow moderately.
As the key interest rate cut had been expected by the markets — albeit not to the same extent — it will only have a minor impact on exchange rates. Many market participants expect the Swiss franc to strengthen slightly next year. The SNB expects inflation in Switzerland to remain stable over the entire forecast period: 1.1 per cent in 2024, 0.3 per cent in 2025 and 0.8 per cent in 2026. The forecast is based on the assumption that the SNB key interest rate will be 0.5 per cent over the entire forecast period. ‘Without the interest rate cut decided today, the conditional inflation forecast would be lower,’ explains Martin Schlegel. He emphasises: ‘We will continue to monitor the situation closely and adjust monetary policy if necessary to ensure that inflation remains within the price stability range in the medium term.’ The SNB's target range for this is an inflation rate of 0 to a maximum of 2 per cent.
The lower SNB key interest rate is also likely to lead to a fall in the mortgage reference interest rate in Switzerland. The Federal Office for Housing will next announce its level on 3 March 2025. If it falls, this will mean that many tenants will be entitled to a rent reduction.
If you have financed your home with a SARON mortgage, you benefit directly because SARON is linked to the base rate. A SARON mortgage now costs 1.64 per cent or more (0.84 per cent plus 0.8 to 1.3 per cent credit rating margin).
If you have financed your home with a fixed-rate mortgage or would like to finance your property purchase with a fixed-rate mortgage, little will change. The market has already priced in the lower interest rates. Therefore, according to financial experts, interest rates for fixed-rate mortgages are likely to move little or not at all after the SNB's decision. Mortgage interest rates have fallen significantly since the first monetary policy assessment in 2024. On 12 December 2024, for example, a ten-year fixed-rate mortgage with UBS key4 mortgages cost at least 1.26%* or 64 basis points less than on 21 March 2024.
The SARON reference interest rate is directly linked to the base rate and can fluctuate. SARON mortgages are therefore suitable for homeowners who can live with interest rate fluctuations and have financial room for manoeuvre. Those who prefer to focus on security and budget precisely for the longer term will sleep more soundly with a fixed-rate mortgage.
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Inflationary pressure is easing and the SNB's outlook points to a further fall in mortgage interest rates (see ‘How are mortgage interest rates developing?’). This is a relief for property buyers as well as property owners who have to extend or redeem their mortgage in the near future.
The key interest rate cut of half a per cent that has now been implemented makes assets more attractive. As financing costs are falling, demand for property is likely to increase. This had weakened somewhat in recent months due to the gloomy economic outlook, high financing costs and high price levels.
According to the UBS Real Estate Bubble Index, home prices rose by 0.7 per cent in the third quarter of 2024 compared to the previous quarter. This corresponds to the average of the last two years. Compared to the previous year, home prices rose by 2.8 per cent, or 1.9 per cent when adjusted for inflation. Despite this price increase, the UBS Swiss Real Estate Bubble Index continued its decline in Q3 2024. It currently stands at 0.41 index points. This is well below the value at the beginning of the 1990s (2.34), when real estate in Switzerland lost up to 40 per cent of its value.
The UBS Real Estate Bubble Index therefore classifies the risk of a property bubble as ‘moderate’. The fundamental factors of rents and income, which increase this risk, are also unable to detract from the overall positive picture.
As mentioned above, most market participants had expected a smaller rate cut.
The SNB currently views the global political situation as relatively uncertain. In particular, the future shape of economic policy in the USA is still uncertain. Political uncertainty has also increased in Europe. In addition, geopolitical tensions could result in weaker global economic growth. It cannot be ruled out that inflation in some countries could remain higher than previously expected. Despite all these reservations, the SNB is forecasting moderate growth in the global economy, a recovery in the purchasing power of private households and lower inflationary pressure. As a result, it is forecasting moderate inflation of 0.3 per cent for the first quarter of 2025.
Mortgage interest rates are likely to fall further slightly or remain stable at a low level following the surprisingly sharp cut in the SNB key interest rate in Switzerland.
What are the forecasts for 2025? The strength of the Swiss franc, for example, speaks in favour of a further reduction in the key interest rate. In the last three months, the franc has gained 2.9 per cent against the euro and 6.7 per cent against the dollar. A strong franc harms export-orientated industry, while a weak franc increases the risk of higher imported inflation. Immediately after the SNB's decision was announced, the franc lost some of its value against the euro and the US dollar. Martin Schlegel does not rule out further interest rate cuts in the future. The monetary authorities will publish their next assessment in March 2025.
Our mortgage interest rate forecast until the end of 2025:SARON mortgage currently:
*Indicative interest rates on 12 December 2024 at 12 noon. The interest rates were set by UBS key4 mortgages on the basis of these parameters: Canton of Zurich, loan amount CHF 500,000, affordability 20 percent (Saron) or 24 percent (fixed-rate mortgages), loan-to-value 50 percent, disbursement date 13 December 2024. These interest rates do not constitute a binding financing offer.
Long-term studies show: In the past, money market mortgages such as the SARON mortgage were more favourable than fixed-rate mortgages. Since October and November 2023, however, short-term and long-term mortgages have been cheaper than SARON mortgages. This is unusual.
Most market participants expect mortgage rates to fall only slightly or remain stable at a low level in 2025. This means that now is probably a good time for many people to finance their own home or condominium on favourable terms for the long term. A look at the historical development of mortgage interest rates suggests that it may currently be worth considering a fixed-rate mortgage with a longer term of 5 or 10 years for financing residential property. When deciding in favour of certain mortgage models, it is always advisable to take your own family and financial situation into account and seek advice from a specialist.
It makes sense not to put all your eggs in one mortgage basket. It is better to spread the financing over different mortgage models and terms. In this way, you spread your interest rate risk and at the same time minimise the risk of having to renew the entire sum at the worst possible moment, for example during a period of high interest rates. UBS key4 mortgages recommends this mix:
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How you finance or refinance your home depends on more factors than just the current interest rate. Your personal and financial situation, future plans, risk capacity and assessment of mortgage interest rate trends play at least as important a role in choosing the right mortgage model and the right term. Seek advice and compare offers, services and prices. The most favourable offer at first glance is not always the best one for you.
