Current economic outlook
Interest rates on longer-term mortgages have fallen sharply in Switzerland over recent months. These cuts are due to two main factors. Firstly, the global economy has weakened considerably. China is in recession, while Europe is at risk of sliding into one due to Germany’s weak economic performance. This is also impacting on the Swiss economy, which, due to the fact that it is small and open, has close links with the European and Chinese economies. The economic weakness has also caused Swiss inflation to fall more quickly than many economists expected.
Secondly, the central banks have responded to this economic news by not raising interest rates on the money market. The financial markets are actually starting to reflect the first interest rate cuts in their expectations for 2024. This has led some banks to cut their refinancing rates significantly, which they will probably pass onto their customers over the coming months.
At the same time, we can imagine that current capital market rates may be slightly too low. In light of rising rents and incidental rental costs, inflation in Switzerland is set to rise again slightly over the coming months. With expected inflation of over 2 percent, final yields to maturity of just 0.6 percent on 10-year Swiss federal bonds seem too low, which means a general increase in the interest rate level is expected over the course of the year.