Interest rates in Switzerland: drivers, forecasts and strategic recommendations

Reading Time: 11 minutes

In recent months, interest rates have risen significantly due to strong inflation, particularly in the USA and the EU. Although Switzerland was not as strongly affected by this development, it also recorded an increase in inflation and interest rates for borrowed capital and financial investments.

Central bank interest rates have a significant impact on the financial and real estate markets. In view of these developments, it is important to know the correlations and influencing factors in the context of interest rate trends in Switzerland.

This article informs investors and borrowers about current interest rate developments in Switzerland and how they come about. Furthermore, an outlook leads to strategic recommendations for both investors and potential real estate buyers.

The most important facts in brief

• The key interest rate in Switzerland is set by the Swiss National Bank (SNB)
• Interest rates in Switzerland are low by global standards
• Savers receive interest again. Savings are losing value in real terms due to inflation
• Real estate buyers should lock in low interest rates for a long time
• Despite higher interest rates, private wealth planning requires diversification

Interest rates in Switzerland: current situation

In Switzerland, too, interest rates affect almost all parts of society: investors, borrowers and the entire economy. In each case, specific interest rates are decisive, depending on requirements.

There are basically four main types of interest rates:

1. Key interest rates: the Swiss National Bank (SNB) sets the key interest rate in Switzerland . Banks have the option of investing or borrowing money from the SNB at short notice at these conditions. The key interest rate is currently 1.75 percent (as at 18.12.2023).

Another reference interest rate is SARON (Swiss Average Rate Overnight), which has replaced LIBOR as the main reference interest rate until 2021. It is calculated daily and is based on the average interest rate of money market transactions carried out by financial institutions in Switzerland. SARON is considered a robust reference interest rate for numerous Swiss financial products and is calculated and published by SIX (Swiss Exchange). As at 15.12.2023, SARON stood at 1.70 percent.

2. Money market interest rates: This includes market interest rates for short-term deposits with terms of up to twelve months.

3. Capital market interest rates: This includes market interest rates with terms of over 12 months and up to 30 years or more.

4. Mortgage interest rates: These interest rates are subject to a similar development as money market interest rates or capital market interest rates. However, the conditions depend on other factors such as the creditworthiness of the customer, the business policy of the respective bank and its refinancing options.

In the following chapters you will find a brief explanation of the main interest rate products and forms of credit with the corresponding interest rates in Switzerland.

Savings interest

As the name suggests, a savings account is used to save capital or as a reserve. It is therefore particularly suitable for short-term investments . Savings interest rates in Switzerland vary depending on the bank and type of savings account. On average, the interest rate for Swiss savings accounts for adults is currently around 0.8 percent. Vested benefits foundations offer similar interest rates on vested benefits accounts. The interest rate level is based on the development of the key interest rate. In most cases, savings accounts are offered by banks without fees.

However, there are differences between the individual banks, which is why it is worth comparing the interest rates on savings accounts. The current range is from 0.38 percent to 1.25 percent (as at 18.12.2023). Higher interest rates are often paid on youth savings accounts. Furthermore, banks sometimes entice new customers with special conditions for new deposits.

Compared to private accounts, Swiss savings accounts generally have more restricted withdrawal conditions, which are often limited to monthly, semi-annual, quarterly or annual withdrawals. Limitations to CHF 50,000 per year are not uncommon. Depending on requirements, it is therefore advisable for investors to open several savings accounts.

Tip: More about vested benefits at Everon

Interest on medium-term notes, fixed-term deposit accounts and time deposit accounts

In Switzerland, the term fixed-term deposit normally refers to investments with a fixed interest rate for terms of up to one year. Unlike medium-term notes, they are not securities.

With medium-term notes, fixed-term deposit accounts and time deposit accounts, investors receive slightly higher guaranteed interest for their deposit during the term than is usual with savings accounts. However, the funds in these forms of investment cannot be withdrawn before the end of the term. The key interest rate also plays a decisive role in the development of fixed interest rates for certain terms. The specific interest rates are set by the Swiss banks depending on their business policy and calculation basis.

As at mid-December 2023, investors can expect interest rates of 1.2 to 1.4 percent on medium-term notes for maturities of one year and 1.5 to 1.6 percent for two-year maturities.

Interest rates for consumer loans

Private customers in Switzerland can currently obtain personal loans from around 5 percent (as at 18.12.2023). The federal government limits the maximum interest rates for consumer loans by law. In doing so, the legislator follows the development of the reference interest rate and regularly adjusts the maximum interest rates.

From January 1, 2024, the following maximum interest rates will apply to consumer loans

• Personal loans: 12 percent
• Overdrafts, installment facility: 14 percent

Mortgage interest rates

Mortgage interest rates in Switzerland vary depending on the type of mortgage, term and provider.

The main types of mortgage are

• Fixed-rate mortgages: these mortgages have a fixed interest rate for an agreed term. The interest rates for fixed-rate mortgages vary depending on the term. For example, the interest rates in Switzerland for a one-year fixed-rate mortgage in mid-December 2023 are around 1.7 percent to 2.00 percent, for a five-year fixed-rate mortgage around 1.70 percent to 2.40 percent and for a ten-year fixed-rate mortgage around 1.90 percent to 2.50 percent.
• Variable-rate mortgages: With this form of financing, the interest rate can change. Interest rates for variable-rate mortgages average around 2.8 percent in mid-December 2023.
• SARON mortgages: With this form of mortgage, the interest rate is linked to SARON. The interest rates for SARON mortgages are currently (as at 18.12.2023) between 0.60 percent and 2.9 percent.

The actual interest rates that a borrower receives depend on various factors. These include the creditworthiness of the borrower, the loan-to-value ratio of the property and the general market conditions. A comparison of interest rates between mortgage providers is therefore also necessary here.

Interest rate level: key influencing factors

The interest rate situation in Switzerland is influenced by various factors, including economic, political and market-related factors.

The factors influencing interest rates include in particular

• the foreign interest rate trend,
• the inflation rate
• the economy and
• the monetary policy of the Swiss National Bank.

Rising interest rates abroad also have an impact on interest rate trends in Switzerland. After all, Switzerland must remain attractive to foreign investors in the long term.

Inflation and deflation affect market interest rates. In the case of financial investments, a kind of risk premium is demanded in the event of high rates of price increase, as investors expect to be compensated for the expected price increase. In this respect, Switzerland continues to look good in an international comparison, so that the SNB currently sees no reason to raise key interest rates further. According to a report in the NZZ on December 14, 2023, the inflation rate in the USA was still at 3.1% in November and 2.4% in the eurozone. In Switzerland, however, it has already fallen again to 1.4%.

Economic trends also have an influence on the general interest rate level. In times of economic boom , investments increase and, as a result, the need for capital. As a result, interest rates tend to rise. The effect works in the same way when the economy is weakening and interest rates are falling.

The Swiss National Bank has a direct influence on interest rates, in particular through the key interest rate, which is used to steer monetary policy and influence the economy.

Interest rates in Switzerland: comparison with international developments

Compared to the major currency areas, Swiss interest rates are lower and less volatile.

The key interest rates of the Swiss National Bank and other major central banks in comparison (as at 18.12.2023):

• Switzerland – Swiss National Bank: 1.75 percent
• Eurozone – European Central Bank (ECB): 4.5 percent
• USA – US Federal Reserve (Fed): 5.5 percent

The central banks make their decisions based on an analysis of economic data and an assessment of the economic outlook. It is true that Switzerland was not entirely immune to negative influences such as the higher inflation rate. Overall, however, an international comparison shows that the Swiss economy is comparatively stable.

Diverse reasons for interest rate changes

Central banks make their decisions based on an analysis of economic data and an assessment of the future economic outlook.

One of the main reasons for interest rate changes is inflation. If inflation rises, the central bank can raise interest rates to reduce the money supply and curb inflation.

Interest rate changes can also occur in response to economic cycles. In times of economic upswing, the central bank can raise interest rates to prevent the economy from overheating. In times of economic slowdown, central banks will tend to lower interest rates in order to stimulate the economy.

Interest rates are also changed in response to exchange rate fluctuations. If a country’s currency becomes too strong, the central bank may raise interest rates to limit the inflow of foreign capital and stabilize the exchange rate.

It should also be noted that international interest rate changes have an indirect impact on Switzerland. For example, influencing the exchange rate has an impact on the export economy. Furthermore, an increase in interest rates abroad may result in money being withdrawn from Switzerland. And as experience shows, a slowdown in the European economy also affects Switzerland.

A look at historical interest rate trends

The State Secretariat for Economic Affairs (SECO) has initiated several research projects to gain insights into the current low interest rate environment. As part of this study, the development of interest rates, exchange rates and inflation rates from the mid-19th century to 2020 was researched.

The real interest rate in Switzerland is currently at a very low level, but this is not unusual in historical terms. The study compares the situation in Switzerland with that of its most important trading partners in a long-term perspective since the mid-19th century.

The Swiss nominal interest rate on Swiss franc bonds (maturities of five years or more) developed differently compared to other countries. In particular, interest rates in Switzerland were higher until the end of the Second World War. They were particularly high in the years before the First World War. Over the past 30 years, nominal interest rates in Switzerland have fallen continuously – even falling into negative territory after 2015. however, a countermovement began in 2023.

The real (inflation-adjusted) interest rate was stable until 1930, before falling significantly. It then remained at a low level until 1980 and then rose again until the mid-1990s, but without reaching its original level. Finally, it fell again and is currently at a historically very low level. The trend is similar abroad, albeit with some differences. It is interesting to note that the Swiss real interest rate was higher than foreign interest rates after the change in Swiss monetary policy in 2000.

Demographic developments obviously have an impact on interest rate trends. The interest rate is lower if the population has a low proportion of young people or a high proportion of pensioners.

How interest rate conditions affect consumers and the financial markets

The impact of interest rate changes on consumers depends on the consumer’s situation.

• For homeowners, interest rates increase the monthly burden. This also means that fewer people can afford to buy property.
• Saving becomes more attractive when interest rates rise. Conversely, lower interest rates can have far-reaching consequences. For example, pension plans based on interest income no longer work out.
• The use of consumer credit is dependent on interest rates. Interest rates therefore indirectly determine consumption.

The effects of interest rate changes on the financial markets are also far-reaching.

• Shares are less attractive when interest rates rise, as the yield on safe bonds is more attractive. This leads to a fall in share prices. If interest rates fall, investments in shares become attractive again and share prices rise.
• Interest rate changes have a direct impact on the bond markets. If interest rates rise, the price of bonds falls. This is because bonds with a higher interest rate are more attractive to investors than bonds with a lower interest rate. If interest rates fall, the price of bonds rises.
• Interest rate changes also have a direct impact on the foreign exchange market. If interest rates rise in a country, the currency of that country becomes more attractive to investors. This can lead to an increase in the exchange rate of this currency. If interest rates fall in a country, the currency of that country becomes less attractive to investors. This can lead to a fall in the exchange rate of this currency.

Reading tip: Portfolio rebalancing – why it is so important

What investors and real estate buyers should consider

If you keep a close eye on changes in interest rates in Switzerland, you have a wide range of opportunities to adjust your own finances accordingly.

The mortgage market

The Swiss National Bank’s (SNB) unchanged key interest rate pause has little impact on variable-rate mortgages. However, fixed mortgage conditions have already reacted to the expectation of a slightly lower key interest rate next year. Longer-term financing is now significantly cheaper than in the previous year, especially compared to SARON mortgages.

The high level of interest rates has reduced demand for real estate. The development of real estate prices could weaken further, and slight price declines are possible in 2024. However, an extreme correction seems unlikely due to the shortage of housing.

Compared to SARON mortgages, a long fixed-rate period is currently advantageous for customers whose fixed-rate period is coming to an end. Long-term fixed-rate mortgages make particular sense if borrowers expect inflation to persist and therefore have little scope for interest rate cuts. In the event of an expected economic downturn and a possible SNB interest rate cut, shorter terms are advantageous.

Investing and saving

Savers are now enjoying interest rates again. The development of savings interest rates follows the ups and downs of the key interest rate. Nevertheless, savers should keep an eye on the current inflation rate. This means that the real value of the money invested is falling at average savings interest rates.

Diversification therefore remains the advice to all investors. Depending on personal risk affinity, this means investing in investment funds, precious metals, ETFs or shares, for example. As interest rates are often higher at banks in other European countries, it is worth comparing interest rates. Important: Despite deposit protection, attention should be paid to the respective country rating.

Reading tip: Investment strategy in focus: The power of the income strategy

Outlook on the interest rate landscape in Switzerland

Interest rates have a significant impact on the strategies of the major players on the financial markets, as interest rates and equities generally tend to move in opposite directions. This is why financial experts are constantly looking at interest rate forecasts.

The SNB left the key interest rate unchanged at 1.75 percent in December. It mentioned that it would raise the key interest rate further if necessary. However, this would require a noticeable deterioration in the price outlook. The prospect of a sustained slowdown in the Swiss economy should keep price risks low in the coming year. There is therefore currently no need for the SNB to take action.

The slowdown in the Swiss economy is primarily due to the slump in global trade, which has dampened the business climate, particularly in Swiss industry. Experts assume that growth in the Swiss economy will remain below average in 2024, but will still be positive.

Factors that could influence future interest rate trends include the inflation rate, the general economic situation, currency developments and the monetary policy of the central banks. The SNB therefore monitors inflation and economic developments in order to set the key interest rate. Based on these assessments, it is expected that interest rates in Switzerland could remain stable or rise slightly over the next few years. The rapid interest rate hikes experienced since June 2022 are likely to be a thing of the past.