The ECB raises interest rates for the first time in three years: Will interest rates now rise in Switzerland as well?

It is a turning point the market has been waiting for for weeks. On Thursday, the European Central Bank raised its base rates for the first time in almost three years. The key deposit rate for monetary policy rises by a quarter percentage point from 2.0 to 2.25 percent, and the other rates follow suit. For homeowners in Switzerland, the immediate question is what this decision means for their own mortgage. The answer is more sober than the headlines suggest.

What was decided in Frankfurt

The increase is driven by the return of inflation. Since the outbreak of the war in the Middle East at the end of February, energy prices have risen sharply, and with them, inflation in the euro area. While annual inflation stood at 1.7 percent in January, by May it reached 3.2 percent, its highest level in over two years. Of particular concern is that price pressure is no longer limited to energy. The core rate and prices of services are also rising, a sign that the shock is becoming entrenched more broadly. The central bank therefore felt compelled to act to maintain its credibility in the fight against inflation.

The move is not without controversy. There was prompt criticism from the middle class and trade unions, saying the increase comes too early and risks stifling an already fragile economy. Indeed, the central bank faces a classic dilemma. Inflation calls for higher interest rates, weak growth for lower rates. Many observers expect another step could follow in September, provided the energy price shock does not subside. But the central bank explicitly did not want to suggest an automatic mechanism.

Why Switzerland is on a different path

The European Central Bank is responsible for the eurozone, not for Switzerland. Here, the Swiss National Bank sets the course, and its starting position is entirely different. While inflation in the eurozone has climbed to over three percent, Swiss inflation remains close to zero. The national bank expects about half a percent for the current year. Accordingly, its key interest rate has been at zero percent since last summer, and it has maintained this rate in its most recent assessments.

The reason for this composure is the franc. In uncertain times, investors seek a safe haven, and the upward pressure on the Swiss currency has increased with the conflict in the Middle East. A strong franc makes imports cheaper and thus curbs inflation, effectively providing a built-in protection against the price shock hitting the eurozone. The national bank is therefore less concerned about inflation and more about the franc becoming too strong. Instead of raising interest rates, it is prepared to intervene in the foreign exchange market if necessary.

Next week, it's the national bank's turn

The Swiss National Bank will provide its next update this coming Thursday. On June 18, it will present its quarterly assessment and faces a weighing of options that is a mirror image of the situation in Frankfurt. On the one hand, higher oil prices are increasing inflation and inflation expectations in Switzerland as well. On the other hand, growth remains subdued and the franc is strong, which dampens external price pressure.

Expectations are accordingly divided. Some observers believe the national bank will keep the policy rate at zero percent for now, given the short-term higher price pressure. Others consider further easing possible, up to and including the oft-discussed return to negative interest rates, should the franc appreciate significantly again. Paradoxically, the decision from Frankfurt helps in this regard. The higher European interest rates are compared to Swiss rates, the less upward pressure there is on the franc, and the more flexibility the national bank has to follow its own path. For mortgage borrowers, it is therefore well worth looking not just at Frankfurt, but especially at Zurich next week.

What this means for your mortgage

For Swiss mortgage borrowers, the most important message is a reassuring one. The rate hike in Frankfurt does not immediately make your mortgage more expensive. The interest rates for money market mortgages based on SARON follow the national bank’s policy rate, which remains at zero. Long-term interest rates also remain low. The yield on ten-year federal bonds, a good indicator for the level of fixed-rate mortgages, was recently just under half a percent. Switzerland is therefore a long way from the situation in the eurozone.

However, it cannot fully decouple. The interest rates for fixed-rate mortgages are set on the capital market, which is internationally interconnected. Rising yields in Europe can push up long-term rates here as well, though to a lesser extent. In fact, fixed mortgage rates have already risen slightly since the escalation in the Middle East at the end of February, while money market mortgage rates have remained unchanged in step with the policy rate. Those considering a long-term commitment would therefore do well to keep an eye on developments. But for now: Both money market and fixed mortgages remain historically cheap in Switzerland. Whether one or the other is better suited to you depends less on the European Central Bank's decision than on your personal situation, your need for planning security, and your assessment of where interest rates are headed.

A good time to review your own strategy

Turning points like this are the right time to calmly recalculate your own financing. Is the certainty of a fixed-rate mortgage worth it, or does the SARON mortgage remain the cheaper choice for now? Would splitting into several tranches be a good idea to spread the interest rate risk? And if a renewal is coming up, the market may well offer better conditions than your own bank is offering proactively. Those who compare offers from several lenders, instead of taking their house bank’s first offer, create the basis for a calm decision.

Conclusion

The European Central Bank’s interest rate turnaround is a remarkable signal, but for now it is a European one. Thanks to low inflation and a strong franc, Switzerland is on a different path, and Swiss mortgages remain affordable. Nonetheless, those who check their own financing now, rather than waiting to react when long-term interest rates move, are acting wisely. Those who know their situation make calmer decisions, no matter what the central banks do next.