Is there a scenario where investment and interest rates could both be increasing?
I know that lower interest rates lead to increase borrowing and thus increased investment spending. So there is usually an inverse relationship.
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2$\begingroup$ as long as return on invstment is higher than interest rate investing is profitable $\endgroup$– CuriousIndeedCommented Feb 15, 2022 at 11:57
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1$\begingroup$ It is also not generally true that lower interest rates increase borrowing. This textbook explanation only holds if nothing else changes. Just like Rubus wrote, if (perceived) return on investment (you can never know up front for sure what your return will be) is lower than the rate you pay, no investment will take place. $\endgroup$– AKdemyCommented Feb 15, 2022 at 23:51
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2 Answers
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As others have mentioned yes, it is possible. It depends on a variety of economic and financial conditions and factors.
Assuming you're asking about corporate investment, yes. If the company has extra capital that could be better put to use by investment than keeping as cash or another asset or potential growth opportunities it could increase investment. Factors such as inflationary conditions, consumer sentiment/ taste, or changing preferences for example could all lead to increased investment, especially if the return on said investment is projected to outstrip the cost of borrowing, or comparative advantage of holding treasuries/cash/other assets. Even in some cases, companies could see the potential for growth where there is an advantage in investment.
In terms of personal investment, that is similarly the case, especially based on longer term views, need of capital, economic conditions, etc. If one believes investment returns to outperform interest rate returns (from instruments like bonds), it would similarly make sense to invest.
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In an environment that has continued Solid Economic Growth, than Yes, Interest Rates can Increase, and Investment can increase.
In Financial Markets, If assumed as Economic Growth is tied to Stock Market Direction, the normal relationship between the US Stock Market and US Treasury Bonds, is for the Stock Market increases, while the Yields for US Treasury Bonds increase. Increase in Bond Yields, means Increase in Interest Rates. In this scenario The more investments the stock markets recieve, the less US Treasury Bonds are bought, which increases the Yields, Hence it increases the Interest Rates. So in a typical scenario, this relationship exists to an extent. But this relationship does not always hold true.
Also as stated in one of the comments above, measuring the rate of return vs interest rate is helpful way to look at it as well.
