| Ramzi Chamat
Interest rates are a crucial lever for a country's economy, directly determining the cost of borrowing for businesses and households. In Switzerland, the Swiss National Bank (SNB) regularly adjusts its key rates based on local and international economic conditions. Currently, while the world is still recovering from the economic impacts of the pandemic and geopolitical repercussions such as the war in Ukraine, the possibility of a further cut in interest rates is being explored. This prospect raises key questions about the potential effects of such a decision. In this article, we will take an in-depth look at the arguments for lowering interest rates in Switzerland and how this measure could promote a sustainable economic recovery and a strengthening of the real estate market. On June 20, 2024, the SNB may decide on a reduction of 0.25 basis points!
For several months, Switzerland has experienced a period of relative stability regarding government bond yields and mortgage interest rates. This lateral trend, in place since March, reflects a certain caution in the financial markets amidst a complex global economic context. However, many voices are advocating for a reduction in interest rates by the Swiss National Bank (SNB). This article explores the various facets of the positive arguments in favor of such a crucial decision for the Swiss economy, particularly the real estate market.
To understand local dynamics, it is essential to place them in a global context. In the United States, the economic situation has been better than expected, delaying the anticipated rate cuts to the second half of the year. Conversely, the European Central Bank (ECB) has already signaled its intention to cut rates as early as June. This divergence between major global economies highlights the complexity of monetary policy decisions and the importance of local economic contexts. For the SNB, this European situation could justify a reduction in its key rates to remain competitive and stimulate the national economy.
One of the main arguments in favor of a rate cut is the control of inflation. In Switzerland, inflation is projected at 1.2% this year and 1% next year, well within the SNB’s fluctuation margin. With a current key rate of 1.5%, some analysts believe this level is slightly too high. A rate cut could thus be justified to maintain an optimal balance between economic growth and price stability.
Bond markets share this view. It is expected that the SNB will reduce its key rate to 1.25% in June, with another likely cut in September. This anticipation is already reflected in current prices, suggesting that investors have incorporated these prospects into their strategies. A rate cut would help maintain favorable financing conditions, crucial for supporting investment and consumption, the main drivers of economic growth.
Forecasts indicate that Swiss long-term interest rates should continue to evolve laterally over the next few quarters. However, mortgage rates linked to SARON (Swiss Average Rate Overnight) should benefit from the SNB’s rate cuts. This could stimulate the real estate market by making mortgage loans more accessible and less expensive for potential buyers. A reduction in mortgage rates also means that existing homeowners could refinance their loans under more favorable conditions, thereby freeing up funds for other investments or consumer spending.
A crucial element of the real estate market is the mortgage reference rate, which is pertinent for rents. Despite the expected rate cuts, this rate should remain stable at 1.75% over the next 12 months. This means that tenants should not expect a reduction in rents, even if credit conditions improve for buyers. This stability can be seen as a resilience factor for the rental market, avoiding too marked fluctuations in costs for tenants. However, in the long term, a continued reduction in mortgage rates could exert downward pressure on rents, improving housing affordability for a larger number of people.
Interest rates are subject to significant variations, influenced by various economic and geopolitical factors. The last significant dynamic change occurred in 2022, with soaring inflation post-pandemic and the war in Ukraine. The SNB, like other central banks, responded by raising its key rates to curb inflation. In 2023, as inflation stabilized, bond yields remained high before falling in anticipation of rate cuts. This recent history illustrates the complexity of monetary management in a globally interconnected environment.
Long-term interest rate forecasts show a slight downward trend, although subject to variations depending on economic conditions. For SARON, rates are expected to drop from 1.46% currently to 1.00% by the end of 2024. Swaps at 3, 5, and 10 years follow a similar trajectory, reflecting a gradual easing of credit conditions. These prospects provide some visibility for businesses and households, facilitating financial planning and long-term investment decisions. Such predictability is crucial for economic stability, allowing companies to plan their capital investments and households to manage their personal finances with greater certainty.
A reduction in interest rates makes credit less expensive, which can stimulate business investment and household consumption. Companies can borrow at lower rates to finance their expansion projects, purchase new equipment, or invest in research and development. Households can benefit from lower mortgage rates, reducing their monthly payments and freeing up funds for other expenses. This increase in consumption and investment can, in turn, support overall economic growth, creating a virtuous circle of economic expansion.
By stimulating investment and consumption, a reduction in interest rates can also positively impact the job market. Companies investing in new projects or expanding are likely to create new jobs. Additionally, increased consumption can lead to higher demand for goods and services, encouraging companies to hire more personnel to meet this demand. Thus, a lower interest rate policy can help reduce unemployment and improve job prospects for many Swiss workers.
The issue of lowering interest rates in Switzerland presents compelling arguments in favor of such a decision. A reduction in rates could stimulate the economy and support the real estate market by making credit more accessible and less expensive. This measure would help maintain favorable financing conditions, essential for encouraging investment and consumption, the main drivers of economic growth. Controlling inflation and the stability of long-term yields further justify such a policy. For investors, borrowers, and real estate market players, the coming months will be crucial for adapting their strategies to rate changes and SNB decisions.
Written by Ramzi Chamat, CEO & Founder of OAKS GROUP (OAKS LANE SA / OAKS CAPITAL SA)
