Interest rates in Switzerland 1852-2020. doi

Summary. The large structural decrease in real interest rates presents challenges for policy makers, for instance hindering the ability of central banks to lower policy rates during recessions. We put this decrease in historical perspective for Switzerland by constructing quarterly data going back to 1852 using novel archival sources and statistical methods. We extract long-term trends for interest rates, inflation, and exchange rate growth, and split the nominal interest rate trend into various components. Using an econometric analysis, we relate the real interest rate to monetary regimes, changes in the pension system, international developments, as well as demographic changes. Nominal interest rates have reached historical lows since the Global Financial Crisis. The persistent decline in inflation explains only part of this pattern. The real interest rate, which removes changes in inflation developments, went through an up-down cycle since the 1970's, albeit to a lesser extent than in other countries. During the 19th century Swiss interest rates were above foreign ones, as Switzerland was still an emerging economy at the time. An increase in trend inflation after Switzerland left the Gold Exchange Standard in 1936 pushed nominal interest rates higher. Nevertheless, Switzerland became an "interest rate island" after 1945, as Swiss real interest rates included a negative premium compared to other countries. While this specificity became less important since the 1980's, Swiss nominal interest rates still declined thanks to lower trend inflation and lower foreign interest rates. The decrease was accentuated in 2015, when the term spread between short and long-term rates vanished after the Swiss National Bank abandoned an exchange rate floor policy and the European Central Bank started a large-scale asset purchase program. An econometric analysis shows that the Swiss real interest rate reflects global drivers and demographic factors. Specifically, a higher share of the elderly population lowers the real interest rate, with an opposite effect for the share of the young population. Furthermore, over the last 20 years, the interest rate island vanished, pushing up Swiss rates relative to other countries. While this recent increase can appear surprising, it is important to bear in mind that it captures an effect relative to the rest of the world, where central banks have moved towards monetary policy regimes more conducive to price stability. This may have contributed to a convergence of international to Swiss interest rate trends. While projections are delicate, as long-term interest rate trends can change rapidly, the low inflation trend observed since the Global Financial Crisis, low global real interest rates, and the shift of the age structure of the Swiss population towards a higher share of older people are likely to keep Swiss nominal and real interest rates low. The Covid-19 pandemic may further reinforce this pattern (Jordà et al. 2020). Low interest rates will thus likely remain a challenge for policy makers.

Policy report published in in-house journal of State Secretariat for Economic Affairs (SECO).