Interest rates affect a myriad of decisionmakers in the economy. They matter, for example, to borrowers looking to start or expand a business, to lenders balancing the risks and rewards of extending credit, to savers deciding to invest in financial assets, and to policymakers gauging the state of the economy. In recent years, nominal interest rates, both short- and long-term, have dropped to historically low levels in all advanced economies. This was largely due to a series of standard and non-standard measures adopted by central banks in the aftermath of the 2008-09 Global Financial Crisis. Importantly, however, long before this period of accommodative monetary policy, interest rates had been on a downward trajectory over much of the past thirty years.

Russia’s invasion of Ukraine in 2022 marked a significant turning point. In July 2022, as the inflation rate in the euro area soared well above its 2 % target, the Governing Council of the European Central Bank decided to raise its key interest rates for the first time since 2011, and further increases took place in subsequent months. After spiralling downwards for three decades, interest rates had bottomed out and were back on the rise. In view of the clear and abrupt ending of the “low-for-long” period, this article reflects on the historical impact of declining interest rates on the investment, indebtedness, profitability, cash positions, and dividend policy of Belgian non-financial firms over a period spanning 1985 to 2022. In addition, the article offers a concise synthesis of lessons that can be learned for the future.

This article is unique in two key ways. Firstly, it covers an unusually large time span. Secondly, it draws on a very rich and extensive micro dataset of individual Belgian non-financial firms (whereas long-term trends are typically interpreted through the lens of macro-data). Both these dimensions allow us to assess whether long-term trends are driven by individual firms or, alternatively, are broad-based in nature. Moreover, they help us to uncover dimensions of heterogeneity and build a bottom-up view of aggregate trends in corporate decision-making in the face of declining interest rates.

Counterintuitively, the article offers evidence that the recent period of declining interest rates was associated with declining investment rates. The absence of a rise in investment, however, contrasts with a positive effect on firms’ financial health. Our analysis reveals, moreover, that lower interest rates have strengthened corporate profitability by way of lower financial charges. Interestingly, rather than diverting rising profits to shareholders, via dividends, firms have typically used their rising profitability to solidify their equity positions. In turn, these stronger equity positions have supported firms’ cash positions, allowing them to scale down their indebtedness.