End of negative interest rates: SNB raises key interest rate to 0.5 percent

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In the fight against inflation, the Swiss National Bank bans negative interest rates and raises the SNB key interest rate by a further 0.75 percentage points.

An end to negative interest rates

For eight years, the Swiss National Bank ‘s (SNB) key interest rate was in negative territory. As some experts already expected, this era is now over. In order to counteract rising inflationary pressure, the key interest rate was raised again by 0.75 percentage points to 0.5 percent on September 22, 2022.

Switzerland was therefore the last country in Europe to return to positive interest rates. The SNB’s decision follows yesterday’s third interest rate hike in a row by the US Federal Reserve and comes amid fears of an impending recession in Europe.

For a long time, the SNB justified its zero interest rate policy – which was first introduced in December 2014 – with the need to curb the rising value of the Swiss franc. Together with the Danish central bank, the SNB lowered interest rates to -0.75 %, the lowest level in Europe. They remained at this level until June of this year, when an increase of 0.5 percentage points signaled a clear rethink on the part of interest rate setters.

Compared to other European countries, Switzerland has so far experienced relatively moderate inflation. In August 2022, inflation reached its highest level in three decades at 3.5%, well above the SNB’s target rate of 2%. The inflation rate in the eurozone currently stands at 9.1 percent.

US Federal Reserve and European Central Bank

Inflationary pressure on central banks continues to increase at a global level. On September 21, 2022, the US Federal Reserve decided to raise interest rates by 75 basis points for the third time. In this way, the Fed intends to aggressively combat the economic weakness in the USA. The increase brings the central bank’s key interest rate into a new target range of 3.00 to 3.25 percent – the highest key interest rate since the global financial crisis in 2008, as reported by CNN.

The European Central Bank also raised its key interest rate around two weeks ago by 75 basis points to 1.25 percent. Based on its current assessment, the ECB assumes that it will continue to raise interest rates. This is being done to dampen demand and prevent the risk of rising inflation.

What does the SNB’s interest rate decision mean for the mortgage and real estate market?

Many homeowners assume that the interest rate changes could have a financial impact for the first time in the coming year. Interest rates, together with other factors such as construction activity or immigration, influence the real estate market and thus also the demand for mortgages. After a prolonged period of extremely low interest rates, they rose significantly on the money and capital markets at the beginning of the year.

The same applies to the price development of single-family homes and condominiums. Even after years of rising prices are still at their highest level. The reason for this is that the Swiss economy has recovered from the 2020 downturn. This phenomenon is mainly due to the record-low mortgage interest rates (1.1 percent in December 2021) and the shortage of properties for sale. And this is not only true in regions such as Zurich or Geneva. Prices for owner-occupied homes continued to rise throughout the country last year.

According to the latest data from the Swiss National Bank’s Financial Stability Report, only residential investment property prices showed signs of a slowdown in the second quarter of this year. Martin Schlegel, Vice-Chairman of the Governing Board of the Swiss National Bank, gave a brief assessment of developments on the mortgage and real estate market during today’s meeting. According to Schlegel, the interest rate trend has had little impact on both markets to date. Prices have continued to rise and the volume of mortgages has also increased further. According to Schlegel, the possible reason for this scenario could be that the effective interest costs for real estate purchases have only risen slightly due to the shift from fixed-rate mortgages to Saron mortgages.

The resilience of the banking system

Looking ahead, the tightening of monetary policy should also ease the risk situation on the mortgage and real estate markets. Against the backdrop of the continued increased vulnerability of this market, however, the resilience of the banking system remains key. To ensure this, the Federal Council approved the SNB’s proposal to reactivate the countercyclical capital buffer in January. This will come into force at the end of September and will help to maintain the resilience of the banking system.

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