The SNB lowers its policy rate to 0.5%: A strategic decision with far-reaching implications.

Introduction

Swiss monetary policy plays a crucial role in maintaining economic stability, particularly during periods of international tension. The significant rate cut reflects a strategy to support the Swiss economy while preserving the nation’s competitiveness. This article examines the motivations behind this decision, its direct effects on households and businesses, and its implications for the future of the Swiss economy.

I. A Historic Rate Cut by the Swiss National Bank

The SNB’s decision to lower its policy rate on December 12, 2024, marks a milestone in Swiss monetary management. By reducing the rate from 1% to 0.5%, the SNB is responding to external and internal economic pressures while aiming to maintain Swiss economic stability.

1. Declining Inflation

One key driver of this decision is the steady decline in Swiss inflation. Inflation fell from 1.1% in August to 0.7% in November 2024, reaching some of the lowest levels among developed economies. This reduction is primarily due to:

• Falling energy and food prices.
• General moderation in the prices of goods and services.

With price stability under control, the SNB justified adopting a more accommodative monetary policy without fear of an inflationary surge.

2. Managing a Strong Swiss Franc

The overvaluation of the Swiss franc remains a persistent issue for the Swiss economy. In 2024, the franc reached record highs against the euro, hurting Swiss exporters and making Swiss goods less competitive internationally.

By lowering its policy rate:

• The SNB makes the franc less attractive to foreign investors.
• It supports exporting businesses, which are vital to Swiss economic growth.

II. Direct Impacts on Households and Real Estate

1. Lower Mortgage Rates

The rate cut has an immediate impact on mortgage interest rates:

• Fixed 10-year mortgages, already attractive, may fall below 1.2%.
• SARON-based mortgages, linked to market rates, are also expected to drop, easing access to homeownership.

These conditions benefit not only property owners but also stimulate the Swiss real estate market.

2. Expected Rent Reductions

Renters could also benefit from this measure. In March 2025, the Federal Housing Office is expected to adjust the reference interest rate for rents, potentially leading to lower rental costs for many households.

3. Disadvantaged Savers

However, this monetary policy is not without drawbacks. Swiss banks are likely to lower interest rates on savings accounts, reducing returns for small investors.

III. A Challenging Global Context

1. Uncertain Economic Environment

The SNB’s decision comes amid a global economic environment marked by:

• Sluggish growth in Germany, the United States, and China.
• Renewed trade tensions fueled by Donald Trump’s election.

In Switzerland, the effects are already evident:

• A slight rise in the unemployment rate.
• Fewer job opportunities, with a decline in vacant positions.

2. Modest Growth Projections

Swiss economic growth is forecasted at 1% for 2024, with potential improvement in 2025 to 1%-1.5%. However, these projections remain fragile due to external uncertainties.

IV. Outlook for 2025

1. Further Rate Cuts Expected?

Many analysts anticipate the possibility of another policy rate cut to 0.25% or even 0% in 2025 if economic conditions warrant it. Although unlikely, negative rates are not entirely off the table.

2. Monetary Policy Under Martin Schlegel

This rate reduction is also symbolic, as it represents the first major decision by the SNB’s new president, Martin Schlegel, who succeeded Thomas Jordan. Schlegel’s leadership is seen as a signal of continuity and stability in Swiss monetary policy.

Conclusion

By cutting its policy rate to 0.5%, the Swiss National Bank aims to address current economic challenges. This move seeks to stimulate the economy, reduce pressure on the Swiss franc, and safeguard the competitiveness of Swiss businesses.

However, this decision also highlights limitations in monetary policy, particularly its impact on savers and its ability to control currency valuation. As Switzerland faces an uncertain 2025, the flexibility and adaptability of the SNB will be essential to maintaining the country’s reputation as a model of economic stability.

FAQ: Key Questions About the Rate Cut

1. Why did the SNB cut its policy rate?
To stimulate the Swiss economy, control inflation, and make the Swiss franc less attractive to foreign investors.

2. What impact will this have on mortgages?
Mortgage rates are expected to fall, making homeownership more affordable for Swiss households.

3. Will rents decrease?
Yes, rents are expected to drop in 2025 due to the Federal Housing Office’s adjustment of the reference interest rate.

4. How does this affect savers?
Interest rates on savings accounts are likely to decrease, limiting returns for small investors.

5. Could the SNB lower the policy rate further?
Yes, if economic conditions worsen, another rate cut to 0.25% or even 0% is possible.

Ramzi Chamat
OAKS GROUP SA