“One person’s pain is another person’s pleasure,” is especially true of interest rates. Low interest rates trouble the saver but delight the mortgage borrower. Over the past 40 years, mortgage borrowers have been able to breathe easy: interest rates have gradually fallen and are currently at a low level. But for how much longer?
This depends on the overall global “economic climate,” which is highly complex. In this article, we address the key variables that property owners should keep in mind and explain why it makes sense to consult the well-researched analyses of financial institutions – even if you already have a basic understanding of these factors.
The Swiss National Bank establishes the key interest rate, which sets the general course. All financial institutions that apply interest rates are guided by this rate, even if mortgage rates also depend on other, more specific factors.
In its interest rate policy, the SNB pursues two clear goals, which are laid down in the Swiss Federal Constitution: firstly, the SNB must ensure stable prices; secondly, it must take account of the economic situation.
But what precisely is the interest rate? Put simply: the price of the money you borrow. If the SNB sets key interest rates low, it is advantageous to get into debt. A low, key interest rate allows “cheap” money to flow into the economy, which tends to stimulate it. If the SNB raises interest rates, money will become more expensive. This can slow down the economy.
To set the key interest rate, the Swiss National Bank monitors price increases, in other words, inflation. To this end, the Federal Statistical Office regularly publishes inflation rates. These reflect how the prices of different items change in a so-called “basket of goods” – for example, food, clothes, rent, transportation, leisure activities and much else.
The word inflation comes from the Latin inflare meaning “to blow into, to puff up.” Inflation is thus a “puffed up” or literally “inflated” money supply, which can lead to rising prices and a loss of purchasing power. If the SNB fears skyrocketing inflation numbers, it will raise interest rates. This makes it more attractive to set money aside rather than spend it. And should stop the increase in prices.
If the economy really takes off, the demand for capital will grow. In a textbook case, this will raise the price of money, that is, interest rates. This is why it is important you have your finger on the pulse of the economy when making interest rate forecasts.
Purchasing Manager Indices are closely watched early indicators. They signal whether industry purchasing managers are looking to the future with confidence – or not. The Purchasing Managers Index (PMI) in the USA gets a lot of attention. The United States is one of the engines of the global economy. The rule of thumb for interest rate forecasts is that as long as this economic engine is not running at full speed or sputtering, central banks will keep interest rates low.
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Market participants do not like surprises – at all. Any change in interest rates could potentially torpedo a company’s financing or investment strategy. Ergo, central banks generally strive to meet the expectations of market participants. They communicate long term and avoid abrupt U-turns. While business circles generally welcome falling interest rates, they view interest rate hikes as showstoppers. Rate hikes make money more expensive – and reduce a company’s desire to make investments.
The Swiss National Bank keeps a close eye on the behavior of the other central banks, especially the American and European ones. It generally follows their lead. Why is that?
If large economic areas pursue a policy of “cheap” money with low interest rates, Switzerland hardly wants to risk it alone by raising interest rates. This would make the Swiss franc, which is already popular with international investors as a safe haven, even more expensive. This, in turn, would make life difficult for Swiss exporters because their products would become even more expensive.
A different interest will be owed depending on the term of a loan. The longer you lend someone money, the higher the interest rate – that is the general assumption. This is because the duration of the loan increases credit risk. If you graph interest rates in a line according to their maturity, you create a yield curve. Normally, this curve bends upwards, meaning short-term interest rates are lower than long-term interest rates.
The yield curve itself reveals a lot about the interest rate trend. A steep curve shows that market participants expect interest rates to rise. A flat curve indicates a sideways trend. But what if long-term interest rates are below short-term interest rates? We then speak of an inverse interest rate structure – which points to falling interest rates.
Even for laymen, a glance at the yield curve is enough for a first impression of where the road might be taking us.
Ultimately, you need the overall picture to make a meaningful interest rate forecast. Research teams from banks examine volumes of market data to arrive at meaningful assessments based on detailed analyses and models. As a homeowner, it is worth not only understanding and keeping track of the individual factors as described above, but also staying regularly informed based on the assessments of banks and other financial players.
