Industries Respond Unevenly to Interest Rate Changes. That Matters for Monetary Policy

July 30, 2026 – As Canada’s economy evolves, so too does the way monetary policy affects business investment. Keeping pace with these changes will allow for more effective monetary policy, according to a new report from the C.D. Howe Institute.

In “Seeing the Whole Picture: How Monetary Policy Shapes Business Investment in Canada,” authors Jeremy M. Kronick and Wendy Wu examine how the composition of Canada’s economy shapes the transmission of Bank of Canada monetary policy through business investment. They identify which sectors are most and least sensitive to interest rate changes, finding that monetary policy does not affect all industries equally.

“This is likely the first Canadian study to examine sectoral investment responses using post-2000 data and detailed firm-level information,” says Kronick, President and CEO of the C.D. Howe Institute. “By looking beyond the aggregate data, we can better understand how different sectors respond to monetary policy and improve the economic models and forecasts that guide decision-making.”

The study begins by examining investment across three broad categories: construction, machinery and equipment (M&E), and intellectual property (IP). It also analyzes subcategories such as residential and non-residential construction, software, and research and development. It then investigates the effect of monetary policy on 10 specific industries. Overall, the authors find that monetary tightening reduces aggregate investment, with shocks that shift the entire yield curve having the largest and most persistent impact. They also find significant differences across subsectors.

Among the broad categories, M&E investment is the most sensitive to higher interest rates, followed by construction and IP investment. Residential construction responds more quickly than non-residential construction, a finding the authors attribute to more interest rate-sensitive housing demand. Within IP investment, research and development investment declines primarily when the entire yield curve shifts upward, while software investment is more affected by medium-term interest rates. The study also finds that corporate leverage has little effect on how monetary policy influences investment, and that monetary tightening has a stronger effect during recessions, particularly through conventional monetary policy.

These differences, along with those of 10 specific industries the authors investigate, also have important regional implications. Provinces with greater exposure to interest-sensitive sectors may experience stronger economic fluctuations following interest rate changes.

“Since monetary policy cannot target individual sectors, these findings can help other policymakers understand how interest rate changes affect different industries while the Bank focuses on controlling inflation,” says Wu, Associate Professor of Economics at Wilfrid Laurier University.

Read the Full Report

For more information, contact: Jeremy M. Kronick, President and CEO, C.D. Howe Institute; Wendy Wu, Associate Professor and Associate Chair, Department of Economics, Wilfrid Laurier University; and Raquel Schneider, Communications Officer, C.D. Howe Institute, 647-805-3918, rschneider@cdhowe.org. 

The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada’s most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.

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