OTTAWA -- Higher borrowing costs fueled by either Bank of Canada rate hikes or bond-yield increases have a more pronounced impact on business investment in the finance, construction and services sector, according to a new analysis from a prominent Toronto think tank.

The C.D. Howe Institute said its analysis of 10 specific sectors can help policymakers at the Bank of Canada anticipate the impact of rate hikes on inflation and demand based on the economy's industrial composition. Higher borrowing costs reduce business investment overall, but its effects differ across investment types and sectors, the study said.

"While the Bank of Canada implements a single nationwide policy rate, our findings demonstrate that monetary policy affects industries unevenly," said the study, co-written by think-tank president Jeremy Kronick. The effects "depend on sectoral composition and the entirety of the yield curve. Since sectoral composition changes over time, this matters for the setting of monetary policy."

The think tank is known as a staunch advocate of fiscal prudence and monetary policy that commits to keeping inflation low and stable.

The study, published Thursday, examined 10 sectors and the impact from increases in the central bank's benchmark rate, and in bond yields. Banks set interest rates on business and consumer loans based on a premium above government of Canada bond yields.

Increases in either central-bank rates or bond yields tends to reduce credit availability, dampens aggregate demand and slows economic growth.

Higher borrowing costs fuel the deepest investment declines in finance, construction and services. Manufacturing and transportation show mixed results. Meanwhile, there is no impact on agriculture and retail, the study indicated.

C.D. Howe said the decline in financial-services investment can be attributed to consumers' sensitivity to higher interest rates. For the Bank of Canada, "this suggests that policymakers may need to monitor finance-sector dynamics closely, since monetary policy-induced contractions might lead to prolonged reductions in credit creation and, in turn, further weaken real economic activity," the study said.

Canada has recorded five consecutive quarters of declining business investment, as firms curtail spending plans due to trade policy uncertainty. The Bank of Canada raised rates aggressively starting in 2022 to contain historically high inflation, reaching 5% in 2023 from a 0.25% level in the previous year. The central bank began easing policy in 2024, and now sits at 2.25%.