Copyright © BusinessAMBE 2023

Belgian companies massively used the decade of ultra-low interest rates (2012-2022) to reduce their debt, according to a study by the National Bank (NBB). Now that that party is over, young companies in particular are at risk of losing out.

Can the European Central Bank's interest rate policy steer the investment drive among companies? That connection is not so unequivocal, is the surprising conclusion of the NBB study. But there is a clear impact on firms' financial health.

In the news: The study takes a look at the period of some 30 years of falling interest rates, up to the turning point of July 2022. At that point, the ECB began its impressive series of interest rate hikes to curb skyrocketing inflation.

Surprising: According to economic textbooks, there is an inverse relationship between interest rates and business investment: the lower the interest rate, the more businesses will invest in new equipment. But according to the data, that relationship is not so clear-cut.

  • "It appears, somewhat counterintuitively, that the period of falling interest rates was accompanied by falling investment rates," the authors conclude. "The three-decade decline in interest rates did not lead to any significant change in firms' use of bank credit. They did not seem to have increased their investment efforts."
  • Of course, other structural or macroeconomic developments may be at play in this, apart from interest rates. But it is notable that the downward investment trend was noticeable in both the (declining) manufacturing and the (growing) service sectors.

But: Lower policy interest rates may not have led to a clear investment boost, but there has been a clear favorable impact on corporate finances. "The fruits of the decline in interest rates are lower financing costs, firmer capital positions and solid liquidity buffers," or still: companies are using periods of low interest rates primarily to build up their cash reserves rather than for major expansion projects.

Interest rate hikes

The mirror image: Young companies, such as start-ups, have not enjoyed the long period of near-zero interest rates. More so, they experienced the fastest interest rate climb in eurozone history since July 2022. As a result, it is much harder for them to fight to stay afloat.

  • For example, the deposit rate, one of the ECB's policy rates, went from 0 percent in July 2022 to 4 percent today. By comparison, between July 2012 and July 2022, that deposit rate was invariably 0 percent and even negative for some time.
  • "It can be assumed that rising interest rates could have opposite effects, resulting in lower corporate profit margins and lower internal financing potential," the NBB warns. "This also means greater reliance on debt to meet working capital needs. And that at a higher cost, especially for younger companies that could not take advantage of the long period of low interest rates to build a solid cash position."

Conclusion: Recent interest rate hikes are hurting younger companies in particular because they have not been able to build buffers like older companies.

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