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What was decided?

The SNB announced on Thursday morning that it would increase the SNB key interest rate 0,5 percentage points to 0.5 percent lowers. The interest rate change applies from tomorrow, December 13, 2024.

In March, June and September of this year, the SNB lowered the key interest rate by one interest rate step (i.e. 0.25 points). This came as a huge surprise in March, as the SNB was one of the first major central banks in the world to begin lowering its key interest rate.

Does the move come as a surprise?

It is no surprise that the key interest rate was reduced. This was assumed. The fact that the key interest rate was reduced by 0.5 percentage points is remarkable. That’s two steps at once. The most recent reductions were only 0.25 percentage points each.

How does the SNB justify its decision?

The underlying one Inflation pressure have decreased again this quarter, according to the current interest rate move. With today’s easing of monetary policy, the National Bank is taking this development into account.

Further interest rate steps are possible: The National Bank will continue to monitor the situation closely, according to the communiqué published on Thursday. The SNB will adjust monetary policy if necessary to ensure that inflation remains within the price stability range of 0 to 2 percent in the medium term. If necessary, the National Bank is also still prepared to be active in the foreign exchange market.

Are rents falling now?

Rental rates in Switzerland are based on the so-called reference interest rate. This is an average of all interest paid on mortgages in Switzerland. These in turn are based on the SNB’s key interest rate.

However, a change in rental rates following a reduction or increase in interest rates does not happen immediately; the reference interest rate is considered a “slow tanker”. The reason: Since long-term fixed-rate mortgages are also included in the calculation, the reference interest rate behaves sluggishly and it takes time for it to rise or fall.

The reference interest rate is adjusted four times a year. It is currently at 1.75 percent and has been since December 2023. The next time it will be adjusted is in March 2025.

The fact is: As of September 30th, the average interest rate for all domestic mortgage claims was only 1.63 percent. If this falls to 1.62 percent, it would be rounded down and the reference interest rate would fall to 1.5 percent. And then tenants could demand a reduction in the rent.

A reduction in rent could be possible for tenants next year.Image: sda

So what does Thursday’s interest rate move mean?

There are many indications that the reference interest rate will fall in March. And not only that. There are experts who say that SNB boss Martin Schlegel will further reduce the key interest rate in the course of 2025, which in turn would have an impact on the reference interest rate.

It is therefore possible that the reference interest rate will be reduced twice in 2025. The chances are good that rents will fall for many tenants.

What are the fundamental effects of a key interest rate cut?

… for savers and investors?

For people who save and/or invest their money, falling interest rates are bad news: they receive lower interest rates for depositing their savings.

… for homeowners?

Basically, lower key interest rates lower all interest rates. This is no different with mortgage interest – i.e. the interest on which mortgage loans have to be paid – but it depends on the type of mortgage. For example, interest rates on longer-term mortgages react differently than those with a shorter term.

Saron mortgages, for example, will immediately benefit from further interest rate cuts by the SNB. When it comes to fixed-rate mortgages, however, what is particularly important is the long-term scenarios that market participants assume. Since there are many indications that the SNB will further reduce the key interest rate in 2025, fixed-rate mortgages are already falling.

What is important, however, is that not all homeowners or potential buyers are affected equally or at the same time. Long-term fixed-rate mortgages, for example, only adjust to the new interest rates when they expire and are then renewed.

… on the stock markets?

In contrast to those who store their money in a savings account, lower interest rates are good news for those who invest in stocks. When interest rates on savings fall, investors may choose to invest their money back into stocks because they may now make more money than they would from saving.

Lower key interest rates are also usually a signal of relaxation. This will make capital cheaper again and private individuals and companies will invest more. This can lead to confidence in the growth of companies increasing again, meaning that more shares will be bought and their prices will rise.

In short: if key interest rates fall, stock market indices rise and vice versa. The two quantities generally behave in opposite ways to each other.

… on the Swiss franc exchange rate?

A reduction in the key interest rate devalues ​​the corresponding currency. The reason: Because it is cheaper, banks borrow more money from the central bank. This increases the amount of money in circulation. And if money becomes less scarce, then its price, or rather the value of a currency, falls.

If the SNB lowers the key interest rate, the franc is likely to depreciate against other currencies, meaning the pressure on the Swiss currency will decrease somewhat. However, in the long term it also depends on whether and how much the central banks of other currencies lower their key interest rates in comparison.