Bank of England working paper finds UK firms’ investment hurdle rates stayed high and adjusted sluggishly to the 2022–23 rate hikes

The Bank of England published Staff Working Paper No. 1,162 examining how UK firms’ investment “hurdle rates” adjusted during the 2022–23 monetary tightening cycle, using Decision Maker Panel survey evidence and analysis of high-frequency monetary policy shocks. The paper finds hurdle rates are generally high and slow to change, so higher interest rates were only partially reflected in firms’ required returns, and firms with “sticky” hurdle rates reduced investment less following contractionary policy shocks. The paper is published to elicit comments and does not represent Bank of England policy. On an employment-weighted basis, around 30% of surveyed UK firms with 10 or more employees reported using a hurdle rate in 2024, rising to 45% when weighting by capital expenditure. Mean reported hurdle rates were 16% in 2024 (median 14%), up from 15.5% in 2021 (median 12%), compared with Bank Rate rising from 0.1% in early December 2021 to a peak of 5.25% between August 2023 and July 2024, while companies’ effective loan rates increased from 2.6% to 6.8%. Only 52% of hurdle-rate users reported updating their hurdle rate within the previous two years, and among firms financing investment with external funds, estimated pass-through from higher borrowing rates to hurdle rates was about 0.37 to 0.41 percentage points per 1 percentage point increase in borrowing costs, implying roughly half of the higher cost of capital was reflected. In the longer-run shock analysis, firms with flexible hurdle rates cut investment more than firms with sticky hurdle rates after contractionary shocks, consistent with separate survey responses indicating larger interest-rate-related capital expenditure reductions for firms that had recently updated their hurdle rates (around 12% by 2023 Q3 versus 7% for non-updaters).