Further increase in SNB rates: what impact will this have on mortgage rates?
The Swiss National Bank (SNB) announced another increase in its policy rate on 23 March 2023. The Saron rate is changing from 1% to 1.5% and short-term mortgage rates, based on Saron, will now be between 2% and 3%. Paradoxically, fixed-rate mortgages are not directly affected.
Why have the central banks increased their policy rates?
The central banks’ policy rates are primarily used to adjust the monetary policy for a currency, predominantly in order to manage inflation. This policy rate, known as Saron in Switzerland, also serves as the basis for the calculation of short-term mortgage rates.
On Thursday 16 March 2023, the European Central Bank (ECB) decided to increase its policy rate by 50 basis points, adjusting it from 3% to 3.5%. This decision was a direct consequence of forecasts of acceleration in the rate of inflation within the eurozone, which could exceed 4.5% in 2023.
In the United States, after inflation spiked to 9% in June 2022, it fell to 6% in February of this year. The FED took the decision, in its meeting on 22 March 2023, to increase its policy rate by 0.25%. This rate is now between 4.75% and 5%. Despite inflation remaining high, the FED decided to act cautiously, probably owing to the recent turbulence experienced by certain American banks (including Silicon Valley Bank), caused among other things by a rapid increase in policy rates in recent months.
Although inflation in Switzerland still remains above the 2% that the government is hoping for, it remains relatively modest. In January and February 2023, it exceeded 3% year on year. However, the SNB decided to follow its European neighbour’s lead and also increase its policy rate by 50 basis points. The SNB’s Saron rate is moving from 1% to 1.5%.
What are the consequences for mortgage rates?
The SNB’s Saron rate, now at 1.5%, will directly affect short-term mortgage rates, which may rapidly increase to between 2% and 3%. Although this increase in rates will have a – temporary – negative effect on mortgage holders who have opted for a short-term strategy, basing themselves on Saron, the phenomenon is not expected to persist in the longer term. It is likely that we will see the Saron rate stabilise this year, or even fall, as long as inflation returns to an acceptable level.
Paradoxically, this is not necessarily bad news for the development of fixed-term mortgage rates. These rates are actually calculated based on the cost at which lenders trade Swiss francs on the financial markets. They are therefore closely tied to the cost at which governments borrow their currency (Confederation bonds), plus a surcharge based on the solvency of the borrowing counterparty (the risk of default by the establishment borrowing from a counterparty on the financial markets in order to then lend to its clients).
The current economic situation's limited prospects for growth, coupled with a situation of stress in the financial sector, are forcing us to conclude that the cost of the Swiss franc is coming down in the long term. The yield on 10-year Swiss Confederation bonds has become volatile, falling below 0.75% in mid-March despite having seen several spikes above 1.50% since July 2022.
We can also see the trends reversing in CHF rates, which sometimes heralds a recession. In other words, contrary to what usually happens, long-term loans have become less expensive than short-term loans. Since the beginning of the year, we have, on several occasions, seen rates for 25-year CHF loans on the capital market that are less expensive than the fixed rate for 2-year loans.
What are the most favourable rates?
If this trend in the cost of Swiss francs continues, we may see fixed-term mortgage rates that are more favourable than short-term mortgage rates based on Saron.
To be continued!