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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EXPLAINED: How coffee in Switzerland is getting more expensive

If you can’t get through the day without your dose of caffeine, the news about price hikes for this drink in Switzerland will leave a bitter taste in your mouth.

EXPLAINED: How coffee in Switzerland is getting more expensive

Switzerland is a nation of coffee drinkers; on average, each adult resident consumes three cups a day.

If you fit into this category, you will have to dig deeper into your pockets to support your, um, drinking habit.

That’s because the price of coffee is rising quite a bit, especially in restaurants.

The reason, according to Coop, which raised the price of a cup of coffee in its restaurants by 20 cents — is the increase in the cost of raw materials, as well as higher transport and energy costs.

READ MORE: How does the cost of living crisis in Switzerland compare to other countries?

So how much will you have to pay for your daily fix?

Depending on where in Switzerland you live and what kind of coffee establishments you frequent, you have likely paid between 3.20 and 4 francs for a cup.

In the 180 Coop restaurants, where a cup coffee with cream used to cost 3.25 francs, the price is now 3.45 francs.

The price of cappuccino increased by 30 cents — from 3.65 to 3.95 francs.

In some 300 Migros restaurants, coffee with cream now costs 3.50 francs — 20 cents more than before — while a cup of cappuccino is now selling for 3.90 francs.

This is a new standard price for a cappuccino in Zurich and the eastern part of the country, while in the rest of Switzerland, it now costs 4 francs, which means a 30-cent increase.

As for Starbucks, it has raised the price of its coffee by 50 cents.

Smaller, privately owned coffee shops, which really depend on the sale of coffee, are now discussing their new price strategy, which they will reveal next week.

This price hike may be hard to swallow for coffee lovers (and leave tea enthusiasts cold), but Swiss consumers have gotten used to the increased cost of food and beverages by now.

Butter, oil, eggs…

With inflation still hovering around 3 percent, many other everyday items  have risen sharply in price as well.

For instance, among foods that people in Switzerland have to pay more for are butter (up by 10.7 percent compared to the same month a year ago), margarine, fats and oils (plus 8.9 percent), as well as milk, cheese and eggs (plus 5.9 percent).
READ MORE: EXPLAINED: The everyday items going up in price in Switzerland 

Non-food items have become more expensive as well. Among them are electricity and other energy sources like gas and heating oil.

However, some prices dropped at the same time: according to data released on Wednesday by the Federal Statistical Office (FSO), cost of fruits and vegetables went down in November, as did hotel accommodations, which is good news ahead of the busy Christmas travel season. 

Overall, electrical household appliances, personal hygiene and telecommunications products – like mobile phones – are now about 30 percent cheaper.

And while the price of healthcare premiums is set to increase in 2023, the cost of more than 300 medicines was slashed by an average of 10 percent in 2022.