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The ripple effect of rate hikes

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A further hike in interest rates, whether it takes effect now or later during the year, would put more pressure on consumers, leaving businesses with no choice, but to absorb costs in the short-term as profit margins continue to shrink.
This is the view of Dawie Maree, head of information and marketing at FNB Business, Agriculture, who says that farmers that are still recovering from the impact of the drought would be hardest hit by a hike in interest rates given that the electricity tariff increase and tyre levy are coming into effect in April and October respectively.

“With profits under pressure and cash reserves gradually depleting, the ability to manage farm operations while servicing debt and keeping up with employee wages will take its toll on farmers,” Maree says. “The impact would likely spread across the entire agricultural value chain with meat consumption heavily affected as struggling consumers cut back on spending and opt for lesser expensive sources of protein.

“Furthermore, if the price of meat continues to increase, there will be a push back from consumers who will avoid eating out, directly affecting restaurants and retailers,” Maree says.

Yudhvir Seetharam, head of Analytics at FNB Business, says that apart from the direct impact on SMEs’ cash flow and ability to service debt, interest rate increases hamper consumer confidence, their ability to spend and save, which ultimately has a direct impact on the bottom line of small businesses.

“As economic conditions continue to get tougher, small businesses that are eager to drive sales will start competing for the attention of consumers who are already cutting back on spending,” says Seetharam. “Efforts will have to be placed on offering customers value for money by making sure that products and services satisfy their needs. Although many SMEs opt to cut back on branding and marketing during tough times, this decision will have to be carefully considered as competitors  may use the opportunity to gain a competitive edge by aggressively promoting their offerings.

“Furthermore, in an attempt to win over more customers, SMEs must avoid making costly pricing mistakes,” Seetharam adds. “For example, if products are priced too high, there is no doubt that consumers will look for an alternative. On the other hand, while lowering prices to attract customers may work in the short-term, it can backfire on the business in the long run, impacting on the business’ ability to maintain profitability.”

A reprieve in interest rates, the duo say, would be welcomed by small businesses and farmers as they navigate economic headwinds and prepare for the tough times ahead.