This is what the 2025 financial year will be like

It is perhaps the most important economic trend of 2024: previously surprisingly high inflation has fallen surprisingly quickly again. At the peak of the inflation wave in the summer of 2022, it was still over 3 percent. As the Economic Research Center at ETH Zurich (KOF) writes in its forecast, there is not much left of it – and that will shape the year 2025.

Inflation back under control

But from the beginning. According to KOF, inflation will only be 1.1 percent in 2024 and 0.5 percent in 2025. At the federal level, the State Secretariat for Economic Affairs still expects annual average inflation of 0.3 percent for 2025 – and therefore not even half as much as in the summer (0.7 percent). 0.7 percent is expected again for 2026, but not because of rising inflation again, but rather because of statistical effects.

There are indications that there will be next to no inflation in the coming months. The KOF adds that its surveys show that in many industries most companies are not planning any price increases in the next three months. And according to the Federal Statistical Office, the national consumer price index has not risen at all over the last 6 months – so at least on average everything remained the same price.

Interest rates fall and fall

This rapid victory over inflation now has far-reaching consequences. The Swiss National Bank (SNB) was able to quickly turn interest rates downwards in 2024. The last preliminary step was that it decided to cut the key interest rate by half a percentage point in December. In 2025 it is likely to continue to decline.

The KOF forecast states that it is assumed that the National Bank will further loosen its monetary policy and reduce the key interest rate again by a quarter of a percentage point in March 2025. Then it would have reached a key interest rate of 0.25 percent, which is why the KOF writes: “The National Bank is scratching the zero interest rate threshold.”

Some mortgages are becoming cheaper

Inflation has fallen sharply and will probably continue to fall. The same applies to the SNB key interest rate – and this now has a long chain of consequences.

Mortgage interest rates would settle at a lower level, according to the KOF. The major bank UBS has published a detailed forecast. Accordingly, the majority of newly concluded money market mortgages currently cost between 1.1 and 1.6 percent. In a year it would still be between 0.8 and 1.3 percent.

Interest rates on ten-year fixed-rate mortgages have already fallen by 0.8 percentage points within a year. But now, according to UBS, not much is happening. The majority of these mortgages currently have an interest rate of between 1.1 and 1.6 percent – and will still have one in a year.

Rents are coming under pressure

The lower key interest rates have already resulted in the average interest rate on all outstanding mortgages falling significantly. Nevertheless, in December it wasn’t quite enough to lower the resulting mortgage reference interest rate. But the time will come in March 2025, writes the KOF. The reference interest rate will fall again for the first time and many renters would then be entitled to a reduction. Seco also expects a falling reference interest rate for 2025.

Raiffeisenbank even says that the average interest rate on all current mortgages could fall so much in 2025 that the reference interest rate will be lowered twice next year. For this to actually happen, the SNB would not only have to scratch the zero line, but also land on it. According to Raiffeisen, this is what will happen: The SNB will make a second cut after March and have a key interest rate of 0 percent in 2025.

Wages: Double surprise for the social partners

Inflation has also surprised the social partners twice in recent years. In 2022 and 2023, consumer prices rose much faster than employers and unions had expected in the wage negotiations at the time. Nominal wages rose less than prices – and real wages fell in both years, as the KOF writes. This meant that people were able to use their wages to buy fewer goods and services than before.

Now the opposite is happening: the social partners have been surprised by the rapid decline in inflation. In the wage negotiations they assumed inflation was too high. Real wages will therefore rise by just over 1 percent in 2024 and by significantly more than 1 percent in 2025. It will also help employees that they will be in short supply on the labor market in the coming years. Demographic aging has brought about a change: more employees are retiring each year than new ones are joining.