Apartment rents in Switzerland have risen by 3.4 percent. However, the increase was offset by the decline in other prices.
The impression is deceptive: Swiss inflation remained constant in May, at a level of 1.4 percent compared to the same month last year. However, the average value conceals major shifts. The increase in apartment rents is particularly striking. These have increased by 3.4 percent compared to the previous year and by 1 percent compared to April. And because rents have a weight of 15 percent in the price index, housing has a particularly strong influence on inflation.
The effect of the higher reference interest rate
The significant increase in apartment rents is not surprising. The Federal Statistical Office (BfS) only collects rental prices once a quarter. Monthly changes in rental costs are therefore only reflected in the inflation data with a delay. In May, rental prices were included in the statistics for the first time since February. This also showed for the first time in the May data the influence of the reference interest rate for tenancies, which was raised in December for the second time after June 2023.
The result: 19 percent of all new tenancies recorded in May saw a rent increase. However, the full effect of the increased reference interest rate on inflation is not yet clear, the BfS stresses. Not only does the increased reference interest rate influence rental prices, but also, for example, new construction, renovations or tenant changes. In addition, some landlords are likely to be delayed in passing on the higher reference interest rate to tenants.
To exclude rents or not?
What do the latest inflation data mean for the Swiss National Bank (SNB), which will be making its monetary policy assessment on June 20? Depending on how rental costs are classified, different conclusions can be reached. If housing costs are taken into account in full, it becomes clear that inflation at 1.4 percent is still clearly in the upper half of the target range, which ranges from 0 to 2 percent. Against this background, there is little reason for further easing of monetary policy.
But there is also another interpretation. For example, the economists at Safra Sarasin emphasize that the increase in the reference interest rate is a one-off effect – an effect that is not permanent and will eventually disappear from the statistics as if by itself. They therefore call for the alleged distorting effect of rent prices to be ignored. If this is done and rental costs are excluded, the result is inflation of just 0.9 percent. This would mean that the scope for further interest rate cuts, possibly as early as June, would appear somewhat greater.
Opinions differ on the financial market. After the SNB caught most observers off guard in March with its cut in key interest rates from 1.75 to 1.5 percent, there is great uncertainty about the central bank’s behavior. The May data correspond almost exactly to market expectations. However, core inflation, which excludes particularly volatile prices – such as those for energy and food – was slightly lower than expected at 1.2 percent.
Inflation comes from within the country
Added to this is the uncertainty surrounding the development of the franc. It has lost a lot of value since the beginning of the year, down almost 5 percent against the euro. A weaker franc is good news for domestic exporters, especially as it increases their competitiveness on foreign markets. However, a lower external value of the franc increases the risk that imports will become more expensive and that Switzerland will once again import inflation from abroad, as was the case at the beginning of the current wave of inflation.
However, such an effect is not yet observable. Imported goods became even cheaper in May compared to the previous year, by 0.6 percent. The price-dampening effect of imports, which has been evident since June last year, is continuing. Inflation is therefore still exclusively attributable to domestic goods. These rose in price by a high 2 percent in May, as in the previous month, with inflationary pressure coming primarily from services, but less so from goods.
What speaks against an imminent interest rate cut is that SNB President Thomas Jordan indicated in a speech last week that the SNB key interest rate is currently very close to the equilibrium real interest rate. This means that the interest rate level is currently unlikely to slow down the economy. Given the comparatively robust economy in Switzerland, there is therefore little justification for easing monetary policy. This is also not the case because the weaker franc already has a stimulating effect.