More rate hikes could lead to retrenchments in South Africa

Increases in the repo rate negatively impact an employer’s liquidity, impacting employees’ job security.

Many experts expect the South African Reserve Bank’s Monetary Policy Committee (MPC) to hike interest rates later this month.

Last month, the SARB hiked interest rates by 50 basis points, increasing the repo rate to 7.75% and the prime lending rate to 11.25% – catching many analysts off guard who only predicted a 25 basis point hike.

Before the increase, several experts believed that the SARB could soon end its rate hiking cycle, however, the SARB remains committed to bringing inflation into its 3% to 6% target range.

Alex Taylor, Prencess Mohlahlo and Matlhatsi Ntlhoro from ENS Africa said that the impact increases of the repo rate on South African employers are often ignored, as focus is mainly placed on consumers.

However, raising the prime rate affects a business’s growth and determines whether a company can meet its financial obligations.

Increases in the prime rate result in lenders, including banks, increasing credit rates, making it more difficult for businesses to secure funding or pay off pre-existing debt.

Moreover, an increase in the prime rate can also decrease cash flow as businesses must set aside more cash towards repaying loan amounts.

Revenue is also affected as consumers have less money for goods and services, especially non-essentials.

Additionally, business loans become more expensive as long-term and short-term debt becomes far more expensive, while it may also become more challenging to repay prime-linked intercompany loans.

The prime rate also may make it more difficult for employers to create or retain jobs, with some possibly forced to restructure their businesses.

This may cause an employer to terminate an employee’s contract for operational requirements, including economic, technological, structural or similar needs of an employer.

Although interest rate increases could affect employees’ job security, they will still have legal recourse as employers have to consult with the employees and trade unions and find alternative arrangements to retrenchment.

For instance, in General Food Industries Ltd v FAWU, the Labour Appeal Court said that “the loss of jobs through retrenchment has such a deleterious impact on the life of workers and their families that it is imperative that – even though reasons to retrench employees may exist – they will only be accepted as valid if the employer can show that all viable alternative steps have been considered and taken to prevent the retrenchments or to limit these to a minimum.”

Thus, the SARB has to balance the need to fight inflation with the needs of the nation’s economy.

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