These are the consequences of the SNB’s interest rate decision

The Swiss National Bank (SNB) has cut its key interest rate by 0.25 percentage points to 1 percent – it was the third interest rate cut in a row. Most players on the financial market had expected this step.

However, the SNB’s announcement that further interest rate cuts could be necessary in the next few quarters was seen as a surprise. Statements about future plans are atypical for the SNB and are more familiar from the US Federal Reserve.

The SNB’s interest rate decision and its outlook also have consequences for tenants, homeowners and savers. Economists and investment experts estimate this as follows:

1. Festive mortgages

Interest rates on fixed-rate mortgages fell by around half a percentage point in the third quarter, according to Moneypark. According to the mortgage broker, the benchmark rate for ten-year fixed-rate mortgages was 1.94 percent on September 20th and 1.76 percent for five-year mortgages. The decline in capital market interest rates is primarily due to disappointing economic data.

According to Jean-Eudes Clot, financial strategist at Banque Cantonale Vaudoise (BCV), the National Bank’s interest rate move was already expected in the market. As a result, he does not expect the SNB interest rate cut to have a strong impact on interest rates on fixed-rate mortgages. He already considers the current conditions to be attractive – especially for security-oriented property owners who want to lock in interest rates over the long term.

2. Saron Mortgages

“With Saron mortgages, the reduction in the key interest rate is directly noticeable,” says Valentino Guggia, economist at Migros Bank. Saron mortgages are mortgages where the interest rates are not fixed over a specific term like a fixed-rate mortgage. Rather, they fluctuate.

With the SNB interest rate cuts, the interest rates on Saron mortgages have fallen in recent months. According to Moneypark, fixed-rate mortgages with medium terms are currently available for the same price, although they offer significantly more security. Fixed-rate mortgages are often even cheaper than Saron mortgages, says Guggia. «This is an anomaly that shows that the market expects further interest rate cuts from the SNB. The market is currently assuming a further interest rate cut by the National Bank by 0.25 percentage points in December this year.

Saron mortgages currently play a rather subordinate role in new purchases and extensions of mortgages, Moneypark continues – this is no wonder given the competitive situation with fixed-rate mortgages.

3. Rent

The SNB’s interest rate cut could also leave its mark on rents in Switzerland. The mortgage reference interest rate is crucial for this. This is based on the average interest rate of domestic mortgages. If it falls, tenants can request a reduction in rent. The Federal Housing Office (BWO) announced at the beginning of September that the reference interest rate would remain at 1.75 percent for the next three months.

However, the average interest rate on domestic mortgage claims was only 1.67 percent as of June 30 of this year. If it falls a little further to below 1.63 percent, the reference interest rate would fall to 1.5 percent due to the rounding effect. Tenants could then demand a reduction in the rent.

Guggia expects that the reference interest rate will most likely fall in December of this year – “and if not then, then it will happen in March next year,” he says. It can therefore be assumed that many tenants will soon be able to demand a three percent reduction in rent. “This should also slow down inflation,” says Guggia. Philipp Merkt, head of investment at Postfinance, also expects that the average interest rate will fall below the threshold of 1.63 percent in December or March and that the mortgage reference interest rate will accordingly be rounded down to 1.5 percent.

Clot, on the other hand, points out that the reference interest rate moves slowly and with a lag. As a result, he is not sure whether it will be ready in December. If the SNB had lowered the key interest rate by 0.5 percentage points, this would have been more likely.

4. Real estate prices

After the SNB interest rate cut, Migros Bank economist Guggia expects prices for apartments and houses in Switzerland to continue to rise. The bottom line is that the SNB’s interest rate increases in recent years have only led to a temporary halt to the rise in prices on the residential property market.

Clot also expects that prices for residential property in Switzerland will continue to rise at a moderate pace. This is supported by the fact that the lower interest rates make financing cheaper. However, the prices are already very high, which also limits the number of potential buyers.

5. Savings and Pillar 3a accounts, medium-term bonds

In the case of savings accounts, however, the reduction in the key interest rate is likely to have negative consequences for private individuals. “The banks will evaluate this and are likely to pass on the interest rate cut,” says Merkt. For savers, this means lower interest rates in the future, both for savings accounts and for pillar 3a. When it comes to the conditions for medium-term bonds, the effect of the interest rate cut is likely to be felt with a slight delay, but here too the trend is likely to be downwards.

7. Franken

An important question is also how the interest rate cut will affect the franc, says Guggia. In the medium to long term, there is a risk that the franc will become significantly stronger than it is currently. Other central banks such as the US Federal Reserve or the European Central Bank (ECB) have significantly greater potential for interest rate cuts than the SNB.