EXPLAINED: What the steep rise in Swiss interest rates could mean for you

The Swiss National Bank (SNB) raised the key interest rate by 0.75 percentage points, putting it back in positive territory at 0.5 percent.

EXPLAINED: What the steep rise in Swiss interest rates could mean for you
Depending on what you are buying, your purchasing power ma go up or down. Photo by Emil Kalibradov on Pexels

As announced by Switzerland’s central bank on Thursday, the rate change applies from Friday, September 23rd.

“The bank’s aim is to counter the renewed rise in inflationary pressure and the spread of inflation to goods and services that have so far been less affected”, according to SNB.

The SNB has not said how long the current rate will be in place, but noted that “it cannot be ruled out that further increases in the SNB policy rate will be necessary to ensure price stability over the medium term”.

READ MORE: Swiss central bank announces big rate hike in inflation fight

Inflation rate in Switzerland currently stands at 3.5 percent. While it is much lower than in the eurozone, where it exceeds 9.1 percent, it is still higher than its usual rate of below 1 percent.

Why has the SNB raised the interest rate for the first time since 2015?

For the same reason that other central banks have done so, including the European Central Bank and the Federal Reserve in the US: price stability

In general, central banks see increasing interest rates as a response to rising inflation: higher rates help reduce the overall level of demand and, subsequently, also the upward pressure on prices.

Whether this strategy will work is another matter.

The SNB rate hikes will “have a fundamentally dampening effect on inflation”, Felix Oeschger, analyst at Moneyland price comparison platform, told The Local.

“However, it is far from clear whether these alone will be enough to curb inflation”, he added.

One for the reasons for this uncertainty, Oeschger said, is that “the energy crisis and the high prices of some agricultural commodities, such as wheat, are a result of the Ukraine war. These prices are more difficult to influence with key interest rate increases”.

In its inflation forecast, the SNB predicted the inflation will drop to 2.4 percent in 2023.

But “considering that the SNB has continuously revised its inflation forecasts upward since December 2021, it is quite conceivable that inflation in Switzerland will continue to rise or at least remain high”, Oeschger pointed out.

READ MORE: EXPLAINED: The groups most affected by inflation in Switzerland

Will the Swiss consumers benefit (or not) from the higher interest rates?

It depends on what you are looking to buy.

If you are planning to buy big-ticket items that are usually purchased with credit — like homes — then you may have to dig deeper into your pockets.

If you already have a fixed-rate mortgage, then you are safe from rate increases for the term of your mortgage.

But for new buyers or those with variable-rate mortagages, things may be more problematic.

“It is not excluded that mortgage interest rates will reach 3 to 4 percent next year”, from the current 2.6 to 3.1 percent, according to Donato Scognamiglio, director of real estate platform Iazi.

What about rents?

Tenants may not be better off than homeowners.

Many have already received notices of higher rents to compensate for increased costs of energy.

Now another charge could be added as well, though probably not immediately.

“Rents will go up, but only when the reference interest rate itself is raised”, Scognamiglio said.

The benchmark interest rate is the average of all mortgage interest rates. If the reference rate increases by 0.25%, tenants will have to pay 3 percent more rent. “I expect this to happen next year”, he said.

But it is not all bad news; higher interest rates will yield some benefits as well.

For instance, if you have certain types of investments, you may see more money coming in.

“I expect yields on fixed-income financial products such as bonds to continue to rise”,  Oeschger said.

“In the case of medium-term notes issued by Swiss banks, we have already seen significant increases since the beginning of the year”, he added.

As for savings accounts, however, “the banks have so far been very hesitant to raise interest rates, but if monetary policy tightens further, we can expect interest rates to rise slightly here as well”.

Generally speaking, what will become cheaper and more expensive for consumers?

The bad news here is that everything that has to do with energy, even indirectly, will become more expensive.

This includes “heating, transport costs, electricity and also food”, another Moneyland expert, Ralf Beyeler told The Local.

READ MORE: Pasta up by 13 percent: How food and energy prices in Switzerland are rising

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Why are Zurich and Geneva among the world’s most expensive cities?

Switzerland’s two largest cities are frequently ranked among Europe’s (and sometimes the world’s) priciest places to live. But what exactly makes them so expensive? We spoke to an expert to find out.

Why are Zurich and Geneva among the world's most expensive cities?

Quite a few studies in recent years have placed both Swiss cities at the top of the “cost of living” rankings. So it’s not really a surprise to anyone that Zurich and Geneva were placed in the top 10 of the most expensive cities in the world, and the two priciest in Europe, in the Economic Intelligence Unit (EIU) Cost of Living 2022 index released last week. 
But why exactly do the two cities keep getting these unenviable titles year after year?

The Local put this question to Daniel Dreier, a financial  expert at Moneyland price comparison platform.

He cited several factors why both municipalities are — at least in some cases — more expensive than many others.

Property prices/rents 

“The obvious reason here is supply in relation to demand,” he said.

Geneva especially has a complicated housing market — the tiny canton has suffered from an acute housing shortage for many years, with demand far outstripping supply.

One of the reasons for the shortage of apartments and, consequently high rents, have to do with Geneva’s geography and demographics. The canton is nestled in the southwest corner of the country, where it is wedged between France and Lake Geneva. The land for new constructions is limited, while the demand is growing steadily along with the population.

READ MORE: Why is Geneva’s rent the highest in Switzerland?

Zurich is the largest city in Switzerland. Photo: Pixabay

Zurich is the largest city in Switzerland. Photo: Pixabay

However, Dreier points out that  less expensive options also exist in both cities, and “residents of Zurich and Geneva can access affordable forms of housing, such as housing cooperatives”.

He added: “Low-income residents have access to government housing projects.”

Health insurance premiums
This is particularly true in Geneva, which has some of the highest premiums for mandatory health insurance in Switzerland, Dreier said.

“But Zurich also has relatively high health insurance premium,” he noted. “The reason for that is that Switzerland’s health insurance system is based on effective healthcare costs in individual premium regions. Urban dwellers generate higher healthcare costs, partly because of the more extensive healthcare infrastructure.”

READ MORE: EXPLAINED: Why do Swiss healthcare premiums vary so much per canton?

A view of Geneva.

A view of Geneva. Photo by Egor Myznik on Unsplash

High road taxes and car insurance costs.
In general, owning a car is more expensive in Zurich and Geneva than in many other parts of Switzerland, according to Dreier.

He  pointed out, however, that while the two cities are known for their high prices, “other costs, such as groceries, public transportation, petrol, childcare, education, and consumer goods, are largely identical to other parts of Switzerland, or cheaper in some cases”.

Also, it is worth noting that Switzerland’s large cities tend to have more subsidised offers for education, sports, culture, etc. than smaller municipalities,” which provides a cushion against the high costs, Dreier added.

Tax differences

From a personal point of view, Dreier made an interesting observation on why parts of life in these cities may not be as pricey as expected. 

“As a resident of Zurich, I personally don’t find [the city] exceptionally expensive compared to other parts of Switzerland,” he said.

“In fact, I live more cheaply here than my friends in a small-town in Bern with the same size family and standard of living, because taxes in Zurich are much lower for our household profile. But obviously a lot depends on your lifestyle.”