Chart 4: Rates of return on capital and cost of capital compared to survey measures Net rate of return for PNFCs (ONS) (a) Net rate of return for PNFCs - 2000-2016 Average cost of loans for private non-financial corporations (b) Weighted average cost of capital (c) Bank Rate Average rate of return (survey) (d) Average hurdle rate (survey) (e) Average cost of bank loans (survey) (f)  Per cent 14 12 10 8 6 4 2 0  2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: Bank of England, ONS Profitability of UK companies and Bank of England Finance and Investment Decisions Survey. (a) UK non-financial corporations' net operating surplus/net capital stock (per annum). (b) Weighted average interest rate of sterling loans made to private non-financial corporations by UK resident monetary financial institutions (excl. the central bank). 11  All speeches are available online at www.bankofengland.co.uk/speeches  11  (c) (d) (e)  This is partly based on estimates of the equity risk premium as described in Inkinen, Stringa, and Voutsinou (2010). There is considerable uncertainty surrounding these estimates. Question 12: 'If you set an investment hurdle rate, what is it?'. Question 5: 'On average, what is the total rate of return realised on investment projects completed in the past 5 years?' . One might still, however, have expected firms' hurdle rates to come down to reflect lower financing costs and lower yields on other investments such as financial assets.
Average annual growth in business investment in the decade before the crisis was 2.4% and in the 15 years before the crisis it was 3.6%. 2  3  All speeches are available online at www.bankofengland.co.uk/speeches  3  One reason for this weak investment since the crisis has been weak demand. Over a run of years, the rate of investment should adjust to maintain the capital stock at a particular level relative to GDP. If GDP grows more slowly, less investment is required to maintain the capital stock at a desired level relative to GDP. This can lead to a vicious circle in which weak demand leads to lower investment that in turn impairs the productive capacity of the economy. This in turn impairs demand as households and businesses revise down their expectations for future income and profits and so on. So what starts as a demand shock can end up as a supply shock. According to the IMF, this effect probably accounts for some of the weakness in investment in advanced economies. 3  But this is unlikely to be the whole story behind the weakness of investment post crisis. One common and repeated candidate explanation is the lack of finance for productive investment. This is not a new issue; it has very deep roots in the UK. The role of banks in providing finance to businesses for investment has been examined many times since Charles Geach’s day.