Global Courant 2023-05-07 10:00:32
Rise in the repo rate negatively impacts an employer’s liquidity and employees’ job security.
Many experts expect the South African Reserve Bank’s Monetary Policy Committee (MPC) to raise interest rates later this month.
Last month, the SARB raised interest rates by 50 basis points, raising the repo rate to 7.75% and the prime lending rate to 11.25% – surprising many analysts who predicted only a 25 basis point increase.
Before the hike, several experts believed that the SARB could soon end the cycle of rate hikes, but the SARB remains committed to bringing inflation within the target range of 3% to 6%.
Alex Taylor, Prencess Mohlahlo and Matlhatsi Ntlhoro van ENS Africa said the repo rate’s impact increases on South African employers are often ignored as the focus is primarily on consumers.
However, increasing the prime rate affects a company’s growth and determines whether a company can meet its financial obligations.
Prime rate increases cause lenders, including banks, to raise lending rates, making it more difficult for businesses to obtain financing or pay off pre-existing debt.
In addition, an increase in the prime rate can also reduce cash flow, as companies must set aside more money to pay back borrowed amounts.
Revenues are also affected as consumers have less money for goods and services, especially non-essentials.
In addition, corporate loans become more expensive as long-term and short-term debt become much more expensive, while it may also become more difficult to repay prime-linked intercompany loans.
The prime rate could also make it harder for employers to create or keep jobs, with some potentially forcing some to restructure their businesses.
This may result in an employer terminating an employee’s contract for operational requirements, including an employer’s economic, technological, structural or similar needs.
While interest rate hikes could affect workers’ job security, they will still have legal recourse as employers must consult with workers and unions and find alternative arrangements for cuts.
For example indoors General Food Industries Ltd v FAWUthe Labor Appeal Court said that “the loss of jobs from austerity is having such a detrimental impact on the lives of workers and their families that it is imperative that – even if there are reasons for cutting workers – they are only accepted as valid if the employer can demonstrate that all viable alternative steps have been considered and taken to avoid or minimize the cuts.”
Thus, the SARB must strike a balance between the need to fight inflation and the needs of the country’s economy.
Read: This is the government’s big plan to help businesses in South Africa
