Shouldn’t it work in the reverse? If businesses are getting loans at higher interest rates shouldn’t they be doubling down on investments as a safety net?
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Say you have 2 investment opportunities (similar risk) – one returns 6%, the other 10%. If the borrowing cost (interest rate) is 5%, then you could do both and still profit. If the borrowing cost is now 7%, then it would make no sense to borrow to invest in a 6% return.
The other effect is the competition for money. If someone could invest in a risky business or asset that earns 10% whereas lending money (risk free) is earning 1%, more people would choose the risky asset/business. If lending money earns 5%, then more people would choose to lend money rather than invest in risky assets.
Rising interest rates results in fewer investments in the short term. Lenders will want lower risks or higher returns before they are willing to lend. Borrowers will not want to undertake projects that have low returns.
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