We have to admit that we misjudged the SNB last week. However, we still believe an interest rate hike would have been necessary. However, we are astonished by the SNB’s reasoning.

It left interest rates unchanged, although its conditional inflation forecast continues to envisage a resurgence of inflation well above 2%. For us, there are three possible interpretations:

  • The Monetary Policy Board does not believe in these forecasts, as it thinks that the economic slump will be much more profound and thus inflation will not rise so sharply again, and is waiting for the next few months.
  • It would like to allow somewhat higher inflation expectations by market participants (this would lead to higher long-term interest rates in the medium term…)
  • Financial stability policy or political reasons

The SNB widely received praise for this decision. The real estate industry is already cheering. The SNB emphasized that further interest rate hikes may still be possible. But most banking and insurance economists aren’t buying it. The consensus among economists now sees the peak of the rate hike cycle at 1.75%. Futures are not currently pricing in any further rate hikes either.

With the analogy to Arthur Burns, who countered the temporary decline in inflation in the U.S. in the 1970s with an expansionary monetary policy, we are probably still slightly premature. But monetary policy must be forward-looking. Assuming increased structural inflationary pressure over the next few years, the current interest rate remains too low. Failure to act now will likely result in the need for higher interest rate increases in the future. The decline in inflation in recent months is also the result of lagged domestic inflation (rents, electricity prices, etc.) and of course the appreciation of the CHF.

Not only are inflationary challenges still ahead, but we also think (similar to the SNB inflation forecasts) that inflation rates have probably bottomed out and are likely to rise again in the coming months. The Swiss franc has weakened significantly due to the decision, while commodity prices are rising again (base effects for energy prices are inflationary again in September…). We are not sure whether a weaker CHF is desirable in an environment of rising commodity prices (see oil prices…)  I.e., very much speaks against considering the inflation dragon is slain.

For interest rate and interest rate futures markets a non-event so far

The Swiss yield curve reacted little substantially to the decision. Interest rates on 10-year government bonds continue to range between 1.05-1.1%. Interest rate futures see the path of short-term rates for the next few years at 1.5%-1.75%, i.e., the trend towards a rate cut from Q4 2024 onwards is expected but is currently not fully priced in. However, the CHF futures yield curve is still relatively flat, especially compared with other countries. The 5-year swap rates have decreased slightly, but remain between 1.7%-1.8%.

Real estate financing: Saron and fixed-rate mortgages are similarly priced, focus on margins

For real estate financing, this does not mean any significant change in the situation compared with before the interest rate decision. Currently, interest rates for Saron financing are in similar ranges as 5-year fixed mortgages. Those who now need to refinance mortgage obligations continue to face significantly higher interest costs regardless of the choice of strategy (short or long term).

The optimal refinancing strategy in the current environment depends on macroeconomic expectations. Suppose one follows the “consensus scenario” of bank and insurance economists. In that case, short-term financing will likely be more advantageous for the next 5 years due to possible interest rate cuts. If our assessment is to be believed, both saron and swap rates will likely rise again in the next few years. Although we expect such a development, we are not sure that long-term interest rates will not come down temporarily, as Germany (and other parts of Europe) is in severe economic problems and could lead to risk-off in financial markets. That’s why it makes sense to stay flexible and have options. Choosing a combination of different strategies when it comes to financing can make sense. We then see a more substantial decline in long-term interest rates as an opportunity to lock in interest rates for the longer term. (We have already recommended this to our customers in 2021…)

However, the choice of financing partner is also essential, as structural changes are underway in the financing market. Sometimes it’s worth doing a “beauty contest”. The house bank does not always offer the most favorable financing. Corefinanz colleagues do an excellent job regarding the selection of the appropriate financing partner for SMEs and institutional real estate owners. (For the sake of transparency, I would like to emphasize that I have been a member of the company’s Board of Directors since the spring, as I am convinced of the need for sound advice on financing.)

Reference interest rates: Roadmap remains unchanged

The reference interest rate is Switzerland’s benchmark for residential rent indexation and is calculated by the weighted average mortgage rate of all outstanding mortgage claims (based on banks balance sheets). It is likely to rise further to 1.75% in December despite the SNB’s decision to keep rates unchanges. We expect another increase of these reference interest rates by 25 basis points in 2024 (even if policy interest rates remain unchanged), so the reference interest rate will likely be 2.0% in twelve months. While Saron mortgages are likely to slow the rise in these rates somewhat, the differential between new mortgages (2.4%-2.7%) and the weighted average rate of loans outsstanding (1.56%) remains wide, so the upward pressure on the average rate is unabated. The upward pressure on existing rents is therefore likely to remain. Until end of next year another 12% of rent increases are therefore in the cards…