Real Rates and Productive Investment: The Profitability Filter

The real rate sets the threshold below which an investment project destroys value rather than creating it. This filter conditions both the volume and the quality of capital accumulation.

The long horizon over which investment decisions are projected makes them especially sensitive to expected future real rates, not only to the level observed today.

Real rate levels determine which investment projects are viable. An analysis of the real profitability threshold and its macro consequences.

Inside the investment committees of major firms, the calculation has been the same for decades: a project is approved only if its internal rate of return exceeds the weighted average cost of capital, a metric that embeds, at its core, the level of real rates. This microeconomic filter, applied simultaneously by thousands of firms, produces a sizeable macroeconomic effect: the real-rate regime selects both the quality and the volume of capital accumulation across the economy. And this mechanism operates with lags. Projects launched under negative real-rate regimes only reveal their low productivity years later, once the cost of capital normalises. Related material: our breakdown of the time lags between rate cycles and profit margins.

The real profitability threshold as a selection filter

An industrial project with a 3% expected real return will be undertaken if the real cost of financing is 1%, but shelved if it reaches 4%. This basic calculation explains why changes in real rates have a non-linear impact on investment. The threshold can be measured. The ECB composite rate on new bank loans to euro-area non-financial corporations stood at 3.38% in Q3 2025 against HICP inflation of 2.07%, a real cost of 1.31%; by July 2026, 3.72% against 2.9% inflation, or 0.82%. A project whose expected real return drops below that level does not clear the committee, and the threshold moves with every inflation release as much as with every rate decision.

This selection has an often-underestimated virtue. According to BIS work on prolonged low-rate episodes, periods of negative real rates coincide with a higher share of “zombie” firms — companies whose operating profits do not cover interest charges but which survive thanks to artificially cheap financing. The BIS put that share at 12% of listed firms across fourteen advanced economies in 2016, against roughly 2% in the late 1980s, on its broad measure; its narrow measure, which adds a test on expected future profitability, gave 6% (Banerjee and Hofmann, Quarterly Review, September 2018). The return to positive real rates reinstates the analytical framework of real rates as a discipline mechanism in capital allocation.

Why a long horizon amplifies the effect

Productive investment decisions are projected over 5, 10, sometimes 20 years. That duration makes profitability calculations particularly sensitive to expected future real rates. A factory built over three years and operated for fifteen embeds, in its financial model, not today’s real rate but an anticipated trajectory across the entire horizon.

This sensitivity explains a recurring paradox: nominal rate cuts do not always revive investment. If firms expect real rates to remain elevated, because inflation falls faster than nominal rates, the headline easing signal is not enough to clear the tipping point for investment. The Fed’s Senior Loan Officer Opinion Survey sets out the chronology: the net share of banks reporting stronger corporate loan demand was still −29 in July 2025, despite the cuts that began in September 2024, and only turned positive in the October survey (+12), then +16 in January 2026. The tipping point does not follow the rate decision, it follows the real cost.

What the current regime implies for the productive base

The transition from a negative to a mildly positive real-rate regime, the early-2026 configuration in the euro area, produces a gradual sorting effect. Maintenance and replacement investment carries on, but expansion projects with marginal profitability are deferred or shelved. French aggregates reveal it late: gross fixed capital formation by non-financial corporations slowed to 0.4% year on year in Q4 2024, then recovered to 2.3% in Q2 2026 (INSEE quarterly sector accounts, current prices). The volume invested does not collapse, it recomposes.

This reconfiguration shifts the sectoral composition of investment without aggregate figures reflecting it immediately. Capital accumulation refocuses on segments with high marginal productivity, at the expense of the extensive expansions that characterised the previous decade. Reading this dynamic correctly requires placing investment flows within the liquidity and financing context that conditions them.

Three observations on the real-rate-investment link

• The real rate acts as a selection filter whose effect is non-linear: beyond a threshold, investment deferrals accelerate sharply.
• The long horizon of productive investment decisions makes expected future real rates more decisive than the level observed today.
• The return to positive real rates in the euro area reinstates a discipline mechanism in capital allocation, at the cost of a temporary slowdown in invested volumes.

Last updated — 6 October 2026