The Bank of England has published a staff working paper examining how monetary tightening affects firm-level research and development, finding that higher interest rates reduce R&D spending and do so most sharply at high-growth firms that recently raised equity. Using Norwegian R&D survey and administrative data for 2001 to 2018, the paper concludes that this pattern is consistent with an asset-price channel of monetary transmission, while standard debt-based measures explain little of the variation across firms. The paper estimates that a 100-basis-point increase in interest rates lowers internal R&D spending by roughly 0.5% of value added. The decline happens quickly, is driven mainly by R&D-related wage spending, and partly reflects an extensive-margin effect in which some firms temporarily stop R&D activity altogether. It also finds that stock issuance falls after tightening and that productivity and return on assets weaken later, suggesting that reduced innovation feeds through to firm performance with a lag. Overall, the research argues that monetary policy affects not only the level of spending but also the allocation of innovative investment across firms, with the burden falling disproportionately on innovation-intensive growth firms.
Bank of England2026-06-26
Bank of England publishes staff paper finding tighter monetary policy cuts R&D most at high-growth firms reliant on equity finance
The Bank of England has published a staff working paper finding that tighter monetary policy reduces firm-level R&D, with the largest cuts concentrated in high-growth firms that recently issued equity. The paper estimates that a 100-basis-point rate increase lowers internal R&D by about 0.5% of value added and leads some firms to stop R&D altogether. Debt-based measures explain little of the cross-firm differences, pointing instead to an asset-price transmission channel.