Assessment of the Interest Rate and Mortgage Market

Interest Rate Market

The new year begins with increased volatility along the yield curve. Apart from short-term maturities, interest rates have risen across all durations. As a result, market expectations for rate cuts have been revised downward. The previously priced-in possibility of a negative key interest rate in the second half of the year is no longer present. Instead, a total reduction of 0.30% is now expected for short-term rates over the course of the year.

This volatility reflects heightened uncertainty in global interest rate markets—driven by persistent inflation in the U.S., government debt, and monetary policy developments. In Switzerland, these factors play a lesser role, resulting in relatively moderate volatility so far.

The yield curve structure continues to normalize, accompanied by rising rates along the curve. This can be interpreted as a positive signal, indicating that the market currently expects higher economic growth.

Swiss Monetary Policy

The average annual inflation rate for 2024 was 1.06% (2023: 2.14%). December inflation data showed a 0.06% price decline compared to the previous month and an overall inflation rate of 0.63% year-over-year. So far, this development aligns with the SNB’s December inflation forecast.

If inflation in January and February remains within the expected range, the SNB is likely to refrain from further rate cuts. The SNB currently assesses the price situation as stable, and any temporary drop in inflation to 0% or even negative territory would likely be short-lived. A 0.25% rate cut in March would require an unexpectedly lower inflation trend.

In the coming months, structurally driven price declines are expected to further reduce inflation. Lower electricity prices in January should have a noticeable dampening effect, and the anticipated reduction in the mortgage reference rate in March could further suppress inflation, potentially leading to lower-than-expected inflation figures.

From a currency and economic policy perspective, there is no urgent need for a rate cut, even though easing could have positive effects. The Swiss franc remains strong, but there is no abrupt appreciation pressure necessitating SNB intervention. Moreover, SECO’s latest forecasts for 2025 and 2026 suggest moderate economic growth—expected to be higher than in recent years but still below the long-term average. How the SNB assesses the current situation and what decision it ultimately makes remains difficult to predict, meaning this meeting could once again surprise many market participants.

Foreign Monetary Policy

At the end of the year, both the ECB and the Fed reduced their key interest rates by 25 basis points. While these decisions were largely anticipated, the monetary policy paths of the two central banks are expected to diverge further in the coming year.

In the Eurozone, inflation rose to 2.3% in November. Despite this increase and persistent inflationary risks—such as rising wages and service prices—the weak economic outlook supports further rate cuts next year. The ECB is likely to maintain its current pace, as growth risks currently outweigh inflation risks. As a result, the ECB is expected to implement additional 25-basis-point rate cuts at its next two meetings.

The Fed’s rate cut, according to Jerome Powell, was contentious and narrowly approved. Further monetary easing has been linked to a significant improvement in inflation dynamics. While inflation rose as expected in November, preliminary indicators suggest that core inflation could regain momentum. Consequently, a slowdown in the pace of rate cuts is anticipated, likely leading to a rate pause at the next meeting.

Mortgage Interest Rates

Fixed mortgage rates have increased by 0.10% to 0.20% compared to the previous month and currently range between 1.35% and 1.70%. SARON mortgages, depending on the individual credit margin, range between 1.20% and 1.40%, remaining more affordable than most fixed-rate mortgages.

If the SNB lowers the key interest rate at its March meeting, SARON mortgages could become even cheaper. However, the potential for further declines in fixed mortgage rates is largely exhausted, and the coming months are likely to be marked by volatility, depending on macroeconomic developments. As a result, the current period could present a good opportunity to secure a fixed-rate mortgage.

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