Do higher interest rates lead to lower investments?

Will high interest rates kill growth?

We have been through period, and maybe we are still in it, where our lack of causal understanding of what drives inflation have been illuminated. If we understand inflation dynamics properly then we would most likely not have ended up in the current situation, but that is of course pure speculation. The other day one economist was mentioning that the higher interest rates were increasing costs for businesses as their floating loans were constantly refinanced at higher interest rates and that investments would likely decline. It sounds plausible that when capital gets more expensive that investments would be negatively impacted. But what if the causality is the other way around? What if low interest rates actually signals that few interesting investments are available in the economy.

If we split the US 10-year yield into quartiles then we can measure the growth in investments in the S&P 500 over the subsequent 12 months. The fourth quartile starts at the 3.84% level in the US 10-year yield and the average annual growth rate in total real investments (here we subtract inflation) in the subsequent year is 9.2%. This level is considerably higher that the third and second quartiles of 2.6% and 2.8% average annual growth rates. The first quartile splits at the 1.99% yield and in the low interest rate environment we measure subsequent growth of 5.9% on average. While these data points are not conclusive, and a proper study should broaden out the data analysis over a longer period and across more countries. But it is an interesting observation that since 2003 the highest growth in S&P 500 real investments has been during periods with the highest level of bond yields. So maybe the evidence is not that supportive that higher interest rates will kill the investment rate in the economy.