What is the impact of interest rate volatility on fixed investment by SMEs?

Details

Supervisors

Candelon, Bertrand

Faculty

Louvain School of Management

Degree label

Master [120] : ingénieur de gestion, à finalité spécialisée

Abstract

enInterest rates are rarely stable. They rise, they fall, and sometimes they shift so rapidly that firms lose any ability to plan ahead. Small and medium-sized enterprises feel this instability more than anyone. They depend on bank credit to finance their growth, and when borrowing conditions become hard to predict, investment decisions become genuinely difficult. This thesis explores that relationship and raises a fundamental question: what is the impact of interest rate volatility on fixed investment by SMEs? To answer this question, the thesis first builds a theoretical foundation. When uncertainty rises, waiting becomes rational. A firm that does not know what its future borrowing costs will look like has every reason to delay an investment rather than commit to an irreversible expenditure. Banks respond by making credit harder to obtain. When rates become unpredictable, they tighten their lending conditions, making credit more costly and harder to get. SMEs rely almost entirely on bank loans and have no other way to raise money. They are in theory the most exposed to these pressures. The empirical analysis puts these ideas to the test. Using accounting data from Belgian firms over the period 2018 to 2024 and a fixed effects regression model, the results confirm that interest rate volatility reduces fixed investment. The effect holds across every alternative specification tested. What is perhaps more surprising is what the data do not show. SMEs do not appear to suffer more than larger firms. Taken together, these results carry a clear message for policymakers. Firms can adapt to high rates, but they struggle to adapt to unpredictable ones. The way a central bank communicates its intentions may matter as much as the decisions it actually takes.